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Print Edition> Business
UPDATED: November 22, 2010 NO. 47 NOVEMBER 25, 2010
Thoughts on the ‘China Model’

Chen Zhiwu (CHEN WEN)

As China stunned the world with its successful growth and economic momentum during the past decade, its development model, dubbed the "China Model" by some scholars, has become the center of attention around the world. So what is the "China Model" and does such a model indeed exist? Chen Zhiwu, a finance professor at Yale University's School of Management, offered his views on these questions as well as China's economic reform and the yuan exchange rate dispute between the United States and China, in an interview with Beijing Review reporter Chen Wen in New York. Edited excerpts follow:

Beijing Review: Your new book China Model Never Exists was published in Taiwan recently. What do you think about the "China Model?"

Chen Zhiwu: No one has been able to provide an accurate definition of what the "China Model" is. If we call the system now being practiced in China the "China Model," then this model is indeed special in some respects.

I think it has at least two major characteristics.

First, the Chinese Government has strict control over the country's economic resources and the access to financial industries. Through state ownership, state-owned enterprises, land and resources all fall under the supervision of the Central Government. Various levels of Chinese authorities have much tighter control over economic resources than Japan and the United States.

Second, China's political system reform has lagged behind its economic reform, and no substantial political reform has occurred during the last three decades.

Right now, I think we need to make it clear that it's too early to decide whether a system works properly or not with only 30 years' experience.

What are the major problems facing China's economy today?

First, China relies too heavily on imports and exports, which has concerned U.S. President Barack Obama and the U.S. Congress and served as one of the hot topics of discussion during the recent mid-term elections in the United States. In spite of the pressure from the outside, China should downsize its imports and exports. The current growth model driven by excessive exports isn't sustainable.

Second, China also relies too much on investments. According to my own calculations, China's fixed-asset investment in 1980 was equivalent to the annual disposable income of 200 million urban residents. But, fixed-asset investment in 2009 equaled to the annual disposable income of 1.2 billion urban residents. It is justifiable to say that China needs such a large scale of fixed-asset investment 10 years ago. If it still counts on fixed-asset investment to power economy in the coming five, 10 or 20 years, the growth model can't be considered sustainable. After all, the final goal of economic development is to raise people's living standard.

The third problem is the slow increase in private consumption. Excessive dependence on investment and exports certainly means that growth in private consumption isn't fast enough to become a major engine of China's economy.

Now, the three problems are just symptoms. The root cause lies within the economic system.

So, what are problems within the system, in your opinion?

First, the right to tax has not been brought under substantial supervision. Premier Wen Jiabao once said that the key to political reform is supervision and restrictions on power. It sounds abstract, but actually it's not.

Take some specific issue as an example. Should part of the income and property of enterprises and residents become government assets by taxation? Since the country doesn't have strict restrictions on the right to tax, fiscal revenue has tripled during the past several years, the proportion of government income in the GDP has increased, but the proportion of residents' income in the GDP has decreased.

The direct result is the proportion of private consumption in the GDP dropped from 69 percent in 1952, to 45 percent in 1978, and to only 35 percent in 2009. In sharp contrast, the proportion of government expenditure in the GDP increased from about 16 percent six decades ago to 30 percent in 2009. To develop the economy in a balanced way, China should let more money flow into ordinary people's pockets to allow more space for private consumption to grow.

Second, state-owned assets' proportion of the total social wealth is too great. According to my preliminary estimate, 70 percent of China's property rights belong to various levels of the government. Since the government owns a majority of the total wealth, the government benefits much more than the residents from GDP growth.

To be frank, this state ownership played a very positive role in the past. Since 1978 (when the country adopted the reform and opening-up policy), it has enabled the Chinese Government to accelerate industrialization and infrastructure construction by mobilizing necessary economic resources. But today China is standing at the point of change. More wealth should be distributed to the ordinary residents and more benefits of economic growth should be enjoyed by Chinese families. Otherwise Chinese economy's reliance on exports and investment will be hard to change.

Finally, more measures should be taken to strengthen the protection of workers' interests and welfare, and raise their income.

What do you think about the Sino- U.S. trade relation and their dispute over the yuan exchange rate?

When I first came to the United States in 1986, the trade surplus from Japan was the talk of the town in the country. Presidential candidates, senators and representatives all used decreasing the Japanese trade surplus as their campaign rhetoric. When China took the place of Japan as the world's major manufacturing exporter in the 1990s, China also became the target of politicians in the United States and some other developed countries.

During the mid-term election this year, U.S. president, the Treasury secretary and candidates for the House and Senate have all had something to say about the yuan exchange rate and trade surplus to put pressure on China. Well, this is really what politics is all about—it's a blame game.

Also, the United States and other economies have been impaired by the financial crisis in the past two years. But before 2008, the U.S. trade deficit might not become such a big political issue. Weakened by the financial crisis, the United States is suffering from an unemployment rate as high as 10 percent, which, to some extent, has re-elevated the politicized Sino-U.S. trade issue to a new height. U.S. pressure on China would not be as great if the financial crisis had not happened, or if unemployment right now were lower.

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