29 December 2009 – Economy faces tricky balancing act in 2010
http://opinion.globaltimes.cn/commentary/2009-12/495189.html
by:  Li Yanjie / Annabel – Global Times
The following is the original, corrected version. The interview as published is much shorter. The comments of Ding Yifan have been removed here.
Editor’s Note:
China emerged as an undeniably great economic power in 2009, but there were still doubts. China has been praised for its efforts in dealing with the economic crisis, but its underlying economic structure has been criticized both outside and inside the country. Ding Yifan (Ding), a researcher with the Development Research Center of the State Council and Gilbert Van Kerckhove, a foreigner who has been in China over 25 years, previously Senior Adviser for the Olympic Economy for the Beijing Municipal Government and also the managing director of Beijing Global Strategy Consulting Co, Ltd, talked with Global Times (GT) reporter Li Yanjie, on China’s economic performance in 2009 and expectations in 2010.
GT: As we near the end of 2009, how do you assess China’s economic performance?
Van Kerckhove: China is one of the few countries that has escaped major turmoil. Other countries have had quite a number of problems. Of course there has been some fallout from the financial crisis, but overall, China’s economy has been performing pretty well.
GT: Little was done to restructure industry this year, since growth was a priority. What policies would you propose should be pursued next year to achieve restructuring?
Van Kerckhove: Well, we had the new Labor Law. Hong Kong reacted against it because many companies there have factories in Guangdong Province, and they complained that because of the labor law, their costs were going up.
But that was actually the plan of the central government; the aim was to improve the salaries and conditions of the workers to boost domestic consumption, and also to force industries to move away from cheap products to more high value products.
The restructuring may be slow, and there were large job losses in some provinces, especially along the East coast, but this is positive in the long run because it forces those provinces to restructure their economy and focus on higher value products.
GT: Beijing’s stimulus package was gigantic, and it has continued with a relatively free monetary and credit policy, and there are worries about future inflation. What policies, in your view, should China take to safeguard against this?
Van Kerckhove: I’m not really expecting a lot of inflation in China. We’ve seen some temporary inflation in the food sector, like garlic and pork prices but overall it should remain modest.
One big challenge for China is to rebalance the internal economy. Some salaries are still too low, like in the construction sector. Construction workers are poorly trained, and no one invests money in training. The price of utilities like water and electricity need adjustment so people pay more attention to the environment.
I think adjusting price levels is a good way for China to rebalance the economy, to force it to change. Look at the Scandinavian countries. They are very efficient. People are well paid, and the products are good. You pay a lot of taxes, but healthcare is good and the country is environmentally sound.
GT: Beijing has been trying to promote domestic demand ever since the economic crisis. How do you evaluate its policies on this regard, such as home appliances going to the countryside and replacement of old appliances? Until now, investment was the major driver of economic growth. What more can be done to promote domestic demand further? High housing prices curtail consumption demand for other goods. The central government has been trying to regulate housing prices, but achieved a contrary result. What policies will be effective?
Van Kerckhove: The measures to improve the countryside, like promoting home appliances and cars are OK but are only temporary. They can do it once but not every year. Concerning the economic growth, the government has to be careful how to allocate the money.
There was a weak point in the stimulus plan, because too much money went to State-owned Enterprises that sometimes didn’t need it. Too much money went to the stock market to stabilize it. Not enough money went to the private sector. A lot went into infrastructure construction. I think it’s good, because still a lot needs to be improved in China, like railway, electric power, roads, highways, water. They are important for the economy, especially for inland enterprises to improve logistics and manufacturing. The government has to continue the stimulus plan but should be careful not to channel too much money to SOEs and it should give more to healthcare, private companies and other sectors in need. China’s private companies are a major part of the economy today. They provide a lot of employment and they need more help from the government.
GT: Since the financial crisis, some developed countries plan to revitalize their manufacturing to decrease trade deficit. Many developing countries may try to win more international market share in a number of ways, including devaluation of their currencies. China’s export volume is down by a wide margin, and many overseas Chinese companies are facing hostile treatment. The US has provoked trade conflicts against China. In your view, will China face more trade conflicts next year? How can China resolve or reduce these conflicts? Will world demand for “Made in China” continue to fall?
Van Kerckhove: As the economy is still weak in the US and unemployment remains high, consumers are not likely to spend a lot of money – they are not ready to buy like before. People, like me, are not too optimistic on China’s export figures, no boom is expected next year. It will not be very bad, but export volume will not return to previous levels.
For the trade relations, I think the problem will continue, which is also a result of the crisis. China is complaining about protectionism from foreign countries. There are more trade barriers, but on both sides. If you look at trade between Europe and China, the imbalance is huge. China says, “you don’t want to export high tech,” actually this is not so true. Europe wants to export high tech to China, but China is reluctant to pay a fair price. Sometimes when high tech is brought into China, it is copied.
China also takes a dangerous road by not allowing fair market access. It will result in more trade disputes. How can China explain the trade imbalance? Any country would be very unhappy if in the same situation. It gives Western politicians ammunition to criticize China.
GT: Do you think Chinese enterprises have grown strong enough to buy foreign companies? China has lost several bids. What do you see as the causes of failure? Any suggestions on this for Chinese enterprises?
Van Kerckhove: I think China will try to continue to invest abroad. There have been problems in the past because of several issues. One issue is political. Some people like in the U.S. and Australia claim “the Chinese are buying up everything here” This is true in part only. Sometimes we explain to our Chinese counterparts that Western countries see the Chinese buying up factories and natural resources, but foreign companies can’t do the same thing in China. Often foreign companies have to accept a joint venture scheme with a minority share, or are not allowed at all to invest. Chinese companies carry out projects abroad that foreign companies could never do in China. That is creating resentment.
The Chinese are making the same mistakes the foreigners did in China a long time ago. One problem is that Chinese companies investing abroad use little local labor and massively use Chinese labor instead. They only eat Chinese and talk Chinese. They take away jobs from the local people. The local people become angry and some attack Chinese, burning down shops. This even happens in Europe. A Chinese company bought a car factory in the UK. The first thing they did was to bring over 10 Chinese cooks. Of course everybody likes its own cuisine. But it’s like you invite me in China for dinner and I say I don’t eat Chinese food, I only eat Belgian food. You will react, “Oh, he hates our food, he hates our culture!”
There are also cultural problems. Our Chinese friends have to learn to integrate better with the local community.
Chinese people are slowly tackling these problems. Some Chinese companies in Europe are using more and more local people.
Some Chinese people ask me, “How should we do abroad?”
“You should do what you told me 28 years ago what I should do in China: ‘You have to employ local people, you have to understand the local market, you have to bring your technology to our country. It must be a mutual benefit. You must respect Chinese culture.”
Now our Chinese friends have to do the same.
GT: The US economy is going steady. Do you think the dollar will increase in value next year? And will the Federal Reserve raise interest rates? If the Federal Reserve does so, China will face the risk of international capital pulling out. How should China prepare for the risk? How much influence does international hot many have on China’s capital markets?
Van Kerckhove: The US economy is still weak and will not improve so quickly. It will affect China. The outlook of the dollar is difficult to predict. I think the US government can’t really increase the interest rate because that would endanger economic recovery. It’s in the same tricky situation like Japan. The dollar might recover a little bit, because now it’s pretty low, but it won’t recover a lot because the US has too much debt and it’s not going to improve soon. The US still needs to continue the stimulus plan, resulting in more debt, and this leaves China worried with all its US dollar reserves.