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The challenges of China's development model

By Zhang Jinming: 0 Comment(s)Print E-mail China.org.cn, June 17, 2012

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The first part: The negative effects of China's development model

Editor's notes:This is the second part of a two-part series by Prof. Zhang Jinming from Jiangxi University of Finance and Economics who examines the negative effects of China's development model as well as the serious challenges facing this model.

China has greatly strengthened its economic competitiveness and overall national strength over the past three decades. However, the country still faces great challenges in terms of resource supplies, domestic demand and global exports.

Limited resources cannot properly support sustainable and rapid economic growth.

Generally speaking, China, the fourth-largest country in the world by land territory (9.6 million square kilometers), after Russia, Canada and the United States, is abundant in natural resources. However, as it also possesses the world's largest population base, the country is poor in terms of per capita natural resources. In 2008, China's population density (persons/square kilometers) was 142, several times that of Russia, Canada and the United States.

In comparison with the U.S., which has a similar land area, it can be seen that China has no distinctive advantages in either topographical conditions or natural resources. About one-third of China's land, mainly desert and alkaline land, cannot be widely utilized. When we declared proudly that we were able to feed 22 percent of the world's population with only 7 percent of its arable land, it not only symbolized the great efforts and progress we had made, but also indicated that our per capita arable land is well below the world's average.

In addition, China's per capita water resources account for only about 25 percent of the world's average. Around 400 of the 660 cities in the country are afflicted by a shortage of water resources, and in the long run, the situation will be exacerbated by continuous population growth. Between 2000 and 2009, China's gross water resources declined from about 2.8 trillion cubic meters to 2.4 trillion cubic meters, with the per capita possession dropping from 2,194 cubic meters to 1,816 cubic meters, down by a remarkable 17.2 percent.

Due to its rapid economic development, China finds itself afflicted by far more severe energy and resource shortages, despite the fact that its energy production has increased rapidly in recent years. Take the petroleum industry as an example. China's petroleum imports surged from 7.6 million tons in 1990 to 230 million tons in 2009, accounting for 61.7 percent of the year's consumption, an increase of 55.1 percentage points.

China's resource utilization efficiency is also lower than the world's average level, and its rapidly dwindling resources cannot adequately support an economic growth model featuring high input, high consumption, but low efficiency. Statistics from the National Development and Reform Commission (NDRC) show that in 2003, China consumed a total of 5 billion tons of various resources, with the consumption of crude oil, coal, iron ore, steel, alumina and cement accounting for 7.4 percent, 31 percent, 30 percent, 27 percent, 25 percent, and 40 percent of the world's total consumption, respectively. However, its GDP took only about 4 percent of the world's GDP aggregate.

The government-controlled, investment-oriented economic growth model is unsustainable.

In contrast with most countries in the world, China's rapid economic growth since 1978 has been largely based on huge investments rather than on consumption. Between 1991 and 2009, social investment in fixed assets increased by an average annual rate of 22.5 percent, much higher than the GDP rate of 10.5 percent. The preference for investment over consumption has been demonstrated by China's GDP composition. In 2007, China's family consumption, government consumption, gross capital formation (investment) and revenue from goods and services from abroad (net exports) accounted for 34 percent, 14 percent, 44 percent and 8 percent of the national GDP respectively, forming a sharp contrast with medium-to-low income countries at 61 percent, 15 percent, 25 percent and -1 percent respectively, and high-income countries at 62 percent, 18 percent, 21 percent and -1 percent respectively.

At the same time, the government's predominant role in economic development has been enhanced, not reduced. In 2009, China's state fiscal expenditure and the state-owned units' investment in fixed assets were 7.6 trillion yuan (US$1.2 trillion) and 7 trillion yuan (US$1.1 trillion) respectively, accounting for 22.4 percent and 20.5 percent of the national GDP respectively, as compared to the proportions of 14 percent and 20.6 percent respectively in 1992. This implies that since China set the goal of developing a socialist market economy in 1992, the government's role in controlling investment and directing economic growth has been further emphasized, although marketization is advancing with the rapid expansion of private sector. The government's fiscal expenditure and state-owned fixed asset investment, if they are broadly categorized as the segment dominated by the government, accounted for 42.9 percent of the national GDP in 2009, an increase of 8.3 percentage points on the 1992 figure.

The government's dominant role in the process of long-term economic growth is also reflected by the rapid increase of the state's fiscal revenue in contrast with the slow growth of citizens' income. In 2009, the state's fiscal revenue hit 6.9 trillion yuan (US$1.1 trillion), 21.8 times that of 1991. The figure accounted for 20.1 percent of the year's national GDP, an increase of 5.7 percentage points. The result is that the citizens saw a rather slow growth in their income. In 2009, the country's expenditure on wages stood at 4 trillion yuan (US$0.63 trillion), 12.1 times that of 1991. The figure accounted for 11.8 percent of the year's national GDP, a fall of 3.6 percentage points.

Between 1991 and 2009, the per capita disposable income of urban households and per capita net income of rural households grew at an average annual rate of 8.3 percent and 5.5 percent, respectively, 2.2 percentage points and 5 percentage points lower than the national GDP, which stood at 10.5 percent, and 10.1 percentage points and 12.9 percentage points lower than the state's fiscal revenue at 18.4 percent.

A slow increase in citizens' income will definitely influence their consumption expenditure. This has been the principle contributor to China's prolonged, insufficient domestic demand. The government-dominated “high investment and low consumption” mode can neither help achieve the ultimate goal of economic development, which is to improve people's livelihoods, nor produce a positive influence on the country's long-term development. Furthermore, China's macro-economy will be at greater risk of fluctuation if it continues to depend on heavy investment rather than on stable and high domestic consumption demand. Once investment slumps, the economic growth rate will slip rapidly as a result.

The labor-intensive production model is unsustainable without strong support from hi-tech and innovation.

China, as the major producer and exporter of certain labor-intensive products, has been called the world's factory. It's estimated that the country makes 70 percent of the world's toys, 60 percent of its bicycles, 50 percent of its footwear and one-third of its suitcases and travel bags, as well as a considerable quantity of its textiles and garments.

However, as British economist Peter Hugh Nolan points out, China is indeed the workshop for the world, rather than the workshop of the world, since 60 percent of the industrial products exported by China are manufactured by foreign-invested companies. In addition, many of the commodities for export are either OEM industrial products, or ordinary goods with low added-value and technology content made for some big transnational businesses. In contrast with some global magnates who have developed their R&D labs in China and hire highly-skilled local talents at relatively low cost, home-grown businesses have made little progress in this regard. No Chinese businesses have edged into the world's top 700 in terms of R&D spending, or appeared among the top 100 global brands.

China's major exports are concentrated on low-profit, labor-intensive products due to the shortage of indigenous innovation and competitive brands, despite the fact that it has seen rapid growth in its exports in recent years. Take the Zhejiang-based garment maker Youngor Group as an example. In the first half of 2005, the company exported more than 400,000 shirts to the United States. A shirt made at a cost of US$7.5 was shipped for just US$8, but would later carry a US$30-US$40 price tag at U.S. retail outlets. The textile industry estimated that Chinese makers garner no more than 10 percent of the total export profits, with U.S. importers and retailers taking the lion's share.

With the constant increase of wages for domestic workers, China will gradually lose its current comparative advantages in production of labor-intensive products. The country will be put in an even more unfavorable position in the increasingly fierce and competitive world market if it fails to enhance its technological and innovative capabilities.

The author is a professor with Jiangxi University of Finance and Economics

(This article was first published inChineseand translated by Zhang Junmian.)

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