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A fresh look at the new dynamics of an old but booming economy
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THE slowdown of the Chinese economy has generated a great deal of academic discussion and a voluminous body of literature. The latest addition to the growing pile is a series of books chiefly authored by Rui Mingjie, a professor at Fudan University’s School of Management.
At a recent seminar and book launch, Rui shared his insights into what he thinks are the “new industry, new models and new dynamics” of the Chinese economy.
Two years into the much-touted supply side reform championed by the Chinese government, one that is meant to cut excess capacity and phase out redundant and polluting businesses, it is time to examine how the reform has fared and whether it has met its desired goals.
Contrary to observers who tend to think that the primary target of the reform is to cut back on inventory and reduce excess capacity, Rui says the reform is much more forward-looking than meets the eye. In fact, it is essentially aimed at constructing a “supply structure catered to future development.”
This new structure will come about only when the official attempt to reduce overcapacity, cut inventories, de-leverage, lower costs and shore up weak growth areas — five principal goals of the supply-side reform — is combined with efforts to adapt to new dictates of the consumer market and challenges of the technological revolution, said Rui.
Indeed, the explosive growth of technology has added even more uncertainty to the future of Chinese economy.
Developments such as the debate on the Industry 4.0 and technological advances in the areas of smart manufacturing and big data have all complicated official and academic efforts to understand the economic challenges ahead.
And one important lesson to be drawn from it all is that policymakers and economists alike need to embrace non-linear thinking, Rui says.
According to him, since the future economic outlook isn’t linear, some vital technological achievements have to be taken into account amid official efforts to construct a new industrial model.
Rui argues that three strategies are essential to the success of the much-heralded ongoing industrial overhaul and upgrade.
One is the adjustment of traditional factors that fuel China’s growth, namely, land supply, cheap labor and easy access to credit.
But as land dwindles and the pool of cheap labor dries up in certain places or sectors, whatever benefits they have created for the economy in the past have been rapidly evaporating, said Rui.
And in his view, the success of the industrial overhaul is mainly predicated on improving the traditional factors, in particular, enhancing human resources and capabilities required for cut-throat competition in the world market.
Up the value chain
The second strategy Rui pinpoints in his new book is somehow familiar. He calls upon Chinese industrialists to move up the value chain. It is widely agreed that China is now stuck at the bottom of the smiling curve, but what is less of a consensus is how to change the status quo.
Rui is much bolder than many of his counterparts in saying that Chinese entrepreneurs should try to become a “controller” of the value chain, rather than being contented at just moving up a rung on the industrial ladder.
Driven by this conviction, he advocates the establishment of world-class Chinese high-tech conglomerates capable of controlling the value chain and spearheading innovation.
Much empirical research conducted by Rui and his team found that almost every industrial value chain is dominated by developed countries.
Even in areas where China is supposed to have a competitive edge, such as ceramics or bone china, the best products are actually made overseas.
In this sense, with the glaring exception of perhaps Huawei and a few other poster boys of the Chinese high-tech boom, Rui says China still lacks its own market leaders.
What matters more than a shift of its role from a low-end manufacturer to a high-end designer is whether it can evolve into a “controller” of the value chain.
And the third strategy Rui says is significant is also a variation of the perennial focus on balanced growth across different regions in the country.
Balanced growth has long been elusive and things may have become worse as northeast China, traditionally a heavy industry powerhouse, experienced a string of problems including demographic decline in recent years that further highlighted its room for improvement.
High-tech challenges
Rui’s books also contains disconcerting revelations about the discrepancy between regional efficiency in high-tech development.
His conclusion that Shanghai’s high-tech sector is actually less efficient and profitable than that of Shenzhen, a southern boomtown, or even neighboring Jiangsu Province, may perhaps unnerve some local officials.
Moreover, despite the rise of emerging new industries across the country, the fact remains that Chinese businesses increasingly find themselves trapped in what Rui calls a “structural pitfall.”
Since quite a few emerging industries in China happen to be the already emerged industries in the West, competition is inevitable and there is naturally little incentive on the part of Western businesses to transfer technologies or know-how to their Chinese counterparts. This is the essence of the “structural pitfall.”
Under these circumstances, much of the dynamics underpinning China’s industrial upgrade still has to come from indigenous innovation in the manufacturing sector, says Rui. Indeed, only in this way can China possibly avoid falling into the “structural pitfall.”
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