China: Acknowledging Economic Inconsistencies

A Jan. 3 article in China's official People's Daily pointed out three paradoxes in the nation's economy. The article highlighted declining consumer prices, low employment rates and a bearish stock market as unexplained phenomena, given China's rapid economic growth. The article offered only brief explanations of how these three issues that "usually accompany an economic depression" are possible despite "the bubbling briskness in current China." The article is just one in a series of semi-official reports and commentaries over the past few months that have drawn attention to inconsistencies in China's economic figures. As a new generation of leaders takes charge in Beijing, they must grapple with shifting internal dynamics — balancing economic policies designed to strengthen China with the initial social fallout from those same policy shifts. As China's leadership publicly acknowledges its difficulties, it likely will begin to carry out dramatic and far-reaching economic experiments. Beijing's admission of potentially serious anomalies in its economic system is, in itself, a positive sign. Unlike the Japanese, who waited until their economy was well beyond repair before sounding the alarm, China is acknowledging its inherent problems early on. Simply admitting there might be a problem, though, does little to alleviate the pressures on the economy. The People's Daily article cited Qiu Xiaohua, deputy director of the National Bureau of Statistics, as brushing aside concerns over the three anomalous data points. Qiu said consumer prices were weak because China's economy was capable of 9 percent or 10 percent growth — one to two percentage points above its current level. Thus, because the economy was not performing at a peak level, consumer prices continued to lag. As for unemployment, Qiu noted that China's increased industrial efficiencies had altered the number of new jobs created by economic growth. According to Qiu, whereas China once created 1 million new jobs for every 1 percent of GDP growth, it now creates only 700,000 to 800,000 new jobs. In addition, changes in agricultural practices have triggered a population movement away from the rural and toward the urban areas, while at the same time state-owned enterprises are laying off workers to streamline their operations. Qiu noted that the bearish stock market was the culmination of several factors — including its small size compared to the overall economy, the weakness of businesses listed and the "profiteering mentality" of investors. Though Qiu explained away the anomalies, he did not deny that they exist. In fact, the article even noted that, while the official unemployment rate was lower than 4.5 percent, many thought it was more accurately set at 7 percent or even 15 percent. Such frank admissions of higher unemployment and structural inefficiencies are becoming more common in China as the new government takes shape and prepares to launch its own variations on the policies of outgoing President Jiang Zemin and Prime Minister Zhu Rongji. In its year-end wrap-up of the top 10 news items of 2002, the People's Daily placed government discussions on the unemployment problem on par with the successful launches of the Shenzhou III and Shenzhou IV space capsules and the overall economic growth for the year. Meanwhile, the government, during the Communist Party congress in November, pointed to the overriding goal of creating a well-off society in the coming decade. With Beijing both admitting to and facing the challenges ahead, the question is what will China do — or more important, what can China do. Leaders in Beijing appear ready to begin softening their economic outlook, giving more serious study to the fundamentals inside China and around the world as they prepare the population for a long, hard struggle. New party General Secretary Hu Jintao, Jiang's heir apparent, recently toured Hebei Province, where he called on all Chinese and especially the party members to unite and work hard toward achieving the goal of a well-off society. He also reminded the Chinese that their economy still is developing, and that they should not fall into complacency. The problems for Hu and his contemporaries are enormous, and we do not envy his task of sorting out China's economic future. We cannot even begin to guess how China will address its problems of unemployment, internal migration, regional disparities and deep-seated economic problems. But in light of some of China's recent moves, it is possible to get an idea of where the country is going in the future. One clear example has been Beijing's focus on its western provinces — sparsely populated areas with concentrations of ethnic minorities that long have harbored dreams of independence. Beijing has made its "Go West" policy a top priority and has drawn foreign companies into that policy. Huge infrastructure projects — from the Tibet railway to the West-East gas pipeline — have remained high priorities for Beijing, and the government also is promoting frontier cities like Xian, Chengdu and Kunming. In order to attract foreign investment in the west, Beijing has offered preferential deals or coupled investment deals in the west with perks in more desirable places in the east. Investors in the West-East gas pipeline, for example, also were offered access to the more immediately lucrative gas distribution network in the eastern provinces. This type of directed investment likely will continue. As the new leadership experiments with minor and dramatic shifts in policy, foreign companies will be just as affected as domestic Chinese firms. China's new leaders will be more flexible and quicker to make small alterations in tactical economic policies than its predecessors were. Foreign businesses must be prepared to ride out what might appear to be the vagaries of Chinese economic policy as Beijing experiments with different solutions.