The country's rebalancing, it now appears, will have barely even gotten off the ground by the end of Xi Jinping's first term as party chief at next fall's 19th party congress; it will then likely require the entirety of his second term (2017-2022) to truly take off.
In the near term, low-hanging fruit will be picked. Mega-mergers of large and modern national SOEs, like the much-anticipated union of Shanghai Baosteel with Wuhan Steel, should reduce some overcapacity and, more importantly, position a handful of strategic state firms to eventually gobble up or drive out of business the dozens or even hundreds of redundant local SOEs that have been zombified by years of protectionist measures and evergreen lending from local governments and their financing entities. The millions of layoffs that this rationalization of the heavy industrial sector will cause will be cushioned in part by transitioning workers to low-skill but tech-enabled services, as is already happening en masse with former coal and steel workers becoming drivers for China's Uber, Didi Chuxing.
Ongoing financial sector reforms over the next couple of years, including gradual opening of the capital account and capital markets to international investment, will assist in improving the allocation of funds to sectors and companies based on real growth prospects. In this light, restraining dodgy subprime debt - as in the case of a renewed crackdown on wealth management products (WMPs) - will also be crucial to corporate profitability (as well as financial stability).
The central government must be prepared to use its considerable fiscal and monetary firepower - undergirded by a far stronger balance of payments than its local counterparts - to mop up the inevitable wreckage that any number of local SOEs and administrations are likely to become as the latest round of credit stimulus likely wears off in 2017 and 2018 and losses build up again. Bailouts are inevitable to prevent propagation of systemic risk, but Beijing must be as frugal as possible: it must seize these opportunities to further downsize redundant firms and local industries (including by merging into the big national champions), slash bloated local bureaucracies, accelerate any delayed or stalled social reforms (like hukou liberalization), and better integrate local finances with national and international capital markets.
Needless to say, this means Xi Jinping and co. will have their plates full of intraparty political battles, especially with local CPC bosses, over the next few years; there's good reason to believe, though, that they're well prepared for them.
These macro-measures will help provide a stable backdrop for the Chinese economy so that it can tackle its true medium to long-term challenge: increasing total factor productivity (TFP).
Without a significant recovery in TFP, which has flatlined or even contracted in recent years, China may well be doomed to the middle-income trap.
McKinsey optimistically assesses that productivity increases can add $5.6 trillion to China's GDP by 2030. The Chinese government has itself made innovation-based entrepreneurship a key pillar of the country's economic rebalancing; it's also relatively clear that "innovation" in the Chinese context isn't so much inventing entirely new technologies as would be the case in the rich world, but primarily adopting and adapting existing advances which are breakthroughs for what's still a developing country.
Even so, as always the communist authorities have already gotten ahead of themselves: all across the country, local government administrations have poured or earmarked billions into questionable "innovation centers" that are awfully reminiscent of previous waves of construction booms that tended to be massive new "financial centers" or exclusive luxury towns.
In fact, not only are the biggest gains on the innovation and entrepreneurship front likely to have little to do with direct government initiatives to promote them, but it's even arguable that the whole focus is skewed: boosting productivity must come as much from superior personnel and management technique as from upgraded capital investment and technology; these are so much less sexy than "whiz-bang" new equipment and tools, for sure, but they potentially have an even deeper and broader societal and cultural effect.
That being said, China has beaten the odds before, and it stands a pretty decent shot at doing so again. There will be both winners and losers, for sure - and the greatest strides in coming years will probably be the fruit of lessons that can only be learned from failure. So long as Beijing remains committed to the long, hard slog - and persistent in its refusal to take shortcuts (like currency devaluation) - it's probably only a question of just how long the Chinese landing will be, and that in itself makes it a soft one.
No comments:
Post a Comment