CHINA HAS MORE ROOM FOR GROWTH!

China has MORE room FOR growTH!*

Since the twentieth century China has navigated within different economic models always with a strong state participation. But in the last three decades, its authorities have driven toward and increasing integration and openness with the global economy, along with a huge boost to export manufactured goods from companies where there is a strong state control.

The giant supplier

Some clouds exist regarding the consequences of the economic slowdown in the Asian giant, which after growing at an average rate of just over 10% between 1991 and 2014, in 2015 for the first time in 25 years its GDP growth rate was less than 7%, 6.9% as estimated by the International Monetary Fund (IMF) (see figure 1). IMF projects that in 2016 and 2017 China will growth 6.5% and 6.2%, respectively; what means that each year it will add to the world economy and economy that`s 90% of the size of the Turkish economy, or 133% the size of the Argentinean economy.

China today is one of the driving forces behind the development of the global economy. Since 1990 the size of its economy has grown more than tenfold, from being the 12th world's largest economy, behind Brazil and Mexico, to become the world's second largest economy, with about 13.4% of the value of the global economy in current dollars, below the US reaching 22.5%. So when China has been growing at rates of 10%, it added 1.3% of growth to the global economy, but with China growing at rates under 7%, its contribution to the growth of the global economy is reduced to half. The global economy has grown at rates of 3.3% in 2013, 3.4% in 2014 and 3.1% in 2015 according to statistics of the International Monetary Fund.

The effects of the downturn and slower growth in China have been felt in different areas, as lower growth in demand for raw materials and energy, and the tumble of their prices, which have severely adversely affected revenues and government budgets for those raw materials exporter countries. We have seen the collapse of copper prices from $ 4 per pound in 2011, to just over $ 2 per pound in 2016; and the collapse of oil prices from over $ 100 dollars per barrel in 2011 to levels of US $ 30 per barrel in February 2016 (Figure 2).

State capitalism

After three decades of the establishment of the Communist China of Mao Tse-tung (1949), where the state took control of most of the means of production, from the early 80s China begin to take some steps towards a more decentralized economic system, opening more space to private capital and individual initiative, but retaining a strong state control and boost in the country's industrialization, using as a vehicle state-owned enterprises (SOE`s).

China reforms have driven to a large-scale industrialization, in a largely centralized economy, which seeks greater integration with the global economy with an emphasis on exporting manufactured goods. These reforms have turned China into a giant supplier of manufactured goods globally, which holds more than 13% of worldwide exports, after having only 1.9% in 1990 and 4.3% in 2001. China can be considered as the economic region with the largest volume of exports in the world, followed by the European Economic Community and the United States. Their model is based on what is known as State Capitalism, where most of the business and economic activity takes place in companies where there is strong state ownership and control. These Chinese companies have become global giants, in diverse sectors, such as manufacturing, natural resources, financial services and utilities. These echoed in that more than 80% of Chinese stock market consists of SOEs, and, for example, also on the fact that in 2015 five of the ten largest companies in the world, according to Forbes ranking, were controlled by the Government of China, including four banks and Petro China.

The strong industrialization policy led by Chinese government, implied that in 2014 the rate of capital investment is 47% of GDP, figure that is almost twice the world average and more than twice the rate of Chile. The strong investment aimed at productive infrastructure and housing has installed a glut of productive capacity and housing that has generated doubts about what`s the true private and social returns on these investments, which, coupled with a strongly intervened financial and securities market, makes it difficult to determine the free or market equilibrium prices, both in the stock and the asset markets. The price system in many sectors of the Chinese economy operates with restrictions, so that adjustments in prices and quantities between supply and demand do not always occur as should happen when supply and demand are freely moved.

It has been the coexistence of public and private decisions in the management of companies which has generated concern regarding the businesses and profitability criteria that exist behind the process of decision making, and development plans of SOEs, and the impact all these have on imbalances at the macro and microeconomic level.

The rapid growth of China, subsidized by a government policy that has encouraged disproportionate investment at the expenses of lower wages, is what has endorsed a strong boost with cheap exports of manufactured goods. The return on assets of state enterprises, which dominate heavy industry, are a third of what is achieved by private companies, and half of what is achieved by foreign companies in China.[1] This situation has meant an increasing level of concern regarding the SOEs, which are seen as "zombie companies". The problem of SOEs with excess of debt and capacity in the Asian giant, with a strong state intervention in their decision making process, are seen as closely intertwined issues within the economic reality of China.

What the Rankings say ABOUT CHINA?

If we consider the place of China in various rankings, and what they speak about the country`s development level, and business environment attractiveness, we see that there is a room for the country to growth more!

China ranks 144 in the Index of Economic Freedom prepared by the Heritage Foundation for a total of 178 economies, which evaluates the right of each person to control their destiny, their work and property; the country is in the number 84 position in the Doing Business ranking compiled by the World Bank for a total of 189 economies in the world, which assesses the ease of doing business looking at the regulatory framework and its implementation; it ranks 90 in the Human Development Index (HDI) prepared by the United Nations for a total of 188 economies, which assesses the average achievements in a country in three main dimensions of human development, say life expectancy and healthy, level of education and a decent standard of living as measured by per capita income; and finally ranks at number 83 in the Corruption Perceptions Index prepared by International Transparency which evaluates the perception regarding the level of corruption in the public sector.

Except for the Index of Economic Freedom, where China is far below the average, in the other measures is position in the middle of the table, which recognizes significant achievements, but also acknowledges the huge space that the country has to growth even more by implementing best practices in areas such as institutions, governance and the rule of law, the fight against corruption, more economic freedom, and in the promotion of more welfare for his population.

Advance reforms: state enterprises and the State

China needs to make progress in promoting reforms where is promoted a proper process of decision making in their companies according to market rules, so that supply and demand find their balance without distortion, and thus prices reflect the true scarcity goods and services. The country should improve markets efficiency by allowing them to operate with increasing degrees of freedom, and that decisions on savings, consumption and investment have a larger component of decision taken on the market and less from the state, guiding its population to have a greater say in consumption and savings decisions. And, reducing the state industrialization bias in the promotion of manufacturing exports, as the main engine of economic growth, at the expense of the population interest that aspires to a more focused economy on what their needs and desires are for higher levels of consumption. All this would allow the production of good and services to expand into areas where the needs and interests of its citizens are, such as health, education and entertainment, with a smaller amount of attention on the beliefs of those who plan and decide the economy from the state. The country needs to deepen reforms that promote inclusion, mostly in rural areas, household spending, and a fairness environment for private and public sector entrepreneurship without the subsidies from the state.

Today, China is moving into this direction, and we might expect that the country will kept growing at rates that in many places are just a dream. China has more room for growth!

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* A Spanish version of this column was published by ClaseEjecutiva in the newspaper El Mercurio of Santiago on April 12, 2016. El Mercurio.
[1] According to “The Economist”, February 27 – March 4, 2016.