China: Enabling A New Era of Changes
Economic reforms in China have entered a new and more difficult stage with its entry into the WTO. This book attempts to throw light on some of the critical issues facing the Chinese economy, bringing together opinions from academia, business and government. Divided into three major portions, the book covers banking reform, administrative monopoly, and financial sector reform as well as matters of strategic concern such as the Taiwan issue.
In the introductory section, Mar and Richter touch upon the difficult state of agriculture in China and the huge liability of the state-owned enterprises (SOEs). While examining the increasing inflow of FDI and China?s burgeoning regional trade, they make several important points with regard to the nature of this FDI, noting that despite China?s image as a global manufacturing base, more than two-thirds of foreign manufacturing in China is for the domestic market.
The second section titled ?Perspectives?, has two parts dealing each with the economy and the geopolitical situation. In the first essay Fan Gang makes the case that China?s model of economic transformation has evolved gradually and in response to the domestic situation. While covering some of the major problems besetting China?s reform process, Fan Gang?s analysis however, tries to put a rather positive spin on China?s problems by misplaced comparisons and recourse to figures in percentage terms. For example, it may be true that at the end of 2001, China?s government debt is less than 16% of GDP but this should not obscure the sheer size of that debt and the enormous implications it has for the national as well as the world economy. Also Fan?s contention that the government has taken fairly good care of laid-off workers is not corroborated by the numerous news reports that come out of China on the issue.
Hank Paulson and Fed Hu?s essay on banking reform in China is a highly readable account of the travails of the system. Despite asset management to deal with bad loans and tighter norms, their ratio in the system still ranges up to 25% or more. The authors argue for the government to take the initiative to resolve the situation and map out various possible solutions to the problem by estimating bank restructuring costs under different assumptions. However, their contention that China adopt a ?big bang? approach to banking reform is one fraught with danger. There is certainly a need for greater accountability and transparency in the system but drastic changes in ownership and the privatization of state-owned banks is only likely to exacerbate China?s problems.
Lawrence Brahm?s piece on Zhu Rongji?s management of the Chinese economy is overly optimist. The account of the 1997 financial crisis in particular ignores (unlike Philip Bowring, later in the book) China?s contribution to the crisis by devaluing its currency in 1994. Students of international economic history will recognize Brahm?s acknowledgement that Zhu was able to make quick decisions and mobilize and utlilise resources effectively because China was essentially an authoritarian state. Andy Xie contends that there is an absence of competition for capital in China ? about three-quarters of credit goes to the state sector while institutional barriers prevent capital from flowing freely to the much more profitable private sector. The author observes the increasing exposure of the banking system to an unstable stock market as well as the fact that there are really no truly Chinese companies with a global reach.
Hu Angang and Guo Yong look at administrative monopoly (AM) as one of the unique features of China?s economic transition. They examine the issue from a theoretical perspective and while the essay tries to take an in-depth look at the issue, the link between AM and corruption has not been brought out very clearly. The losses due to AM, including that in social welfare, are substantially greater than those due to petty corruption. Hu and Guo also reflect the new economic thinking in ?socialist? China as they argue for the government?s withdrawal from higher education and medical care among other things. The authors also assert that regional monopolies mean that the Chinese domestic market is becoming increasingly fragmented even as China tries to integrate itself into the global economy.
The geopolitical context is dealt with exhaustively by Philip Bowring. He examines China?s options on the world stage taking into account both domestic compulsions and external factors. He looks at several issues including agricultural production, urbanization, the rural-urban divide, and the Taiwan issue. In the process, he takes a more nuanced look at the consequences of China?s trade links, its tariff structures, and WTO membership.
Zhang Yunling and Victor L L Chu, analyze China?s relations with its neighbours: the former in terms of its participation in the new regionalism involving the ASEAN + 3 formula and the latter with Japan in particular. Zhang argues for an East Asian Free trade Area (FTA) and points out the need for institution-building if the project is to succeed. Chu characterizes the relationship between the two East Asian giants as being a ?competitive partnership? with the possibility that Japan can help China as well as rejuvenate its own economy by providing the Chinese private sector access to international equity funding.
The six short essays in this section penned by government figures are useful in that they give a broad overview of some of the thinking doing the rounds in Chinese policy circles since China entry into the WTO. As is to be expected, they largely promote the government line and there is often a statement of historical facts, with a statistic or two thrown in, without really being informative. However, the essays on urban policy in Nanjing and on venture capital are interesting, if only for the sheer novelty of these policies in China.
The executive roundtable brings together views from sections of the business community currently at the forefront of economic activity in mainland China. There is both old money and the newly rich class of entrepreneurs here who hold forth on a range of issues such as the prospects for China?s future growth, reform of SOEs, the IT industry, Chinese economic regions and the challenges on the human resources front. There is an acknowledgment of some of the problems facing the Chinese economy, but overall the mood is one of optimism in China?s continued growth and prosperity.
Chinese academics and government officials compete with authors drawn from well-known global financial institutions such as Goldman Sachs and Morgan Stanley, in reflecting the ideology of the World Economic Forum that has funded this exercise. The discourse is largely neo-liberal, emphasizing the withdrawal of the government from large sectors of the economy. There is only a cursory glance at China?s challenges in agriculture or in the education sector, both crucial to its continued economic well-being. Implicit too in these essays is the continued ability of the Chinese government to maintain control and ensure stability. The ?best case/worst case? scenarios presented in the introduction, are rather simplistic and fail to do justice to the complexities of the Chinese political and economic system.
The book suffers from essays of uneven quality and scope and Mar and Richter seem to have merely compiled the essays without ensuring an essential unity in presentation. This is overall, a book for the lay reader who wants an overview of the various problems and challenges facing the Chinese economy today and their possible solutions. However, it is unlikely the reader will come away with the complete story.