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News Overview 2015

Where Are Economic Reforms Taking the People’s Republic?

The Chinese economy was long considered an unshakable engine of growth, but now it seems to be running out of steam. Or is this just a temporary slowdown, which may even have a healing effect? Dr. Ingrid Hamm, Chief Executive Officer of the Robert Bosch Stiftung, used this question to kick off an event entitled "Showdown or Slowdown: What to Expect for China’s Economic Development in 2015 and Beyond," which was held at the Foundation’s Berlin Office.

What are the reasons for this stagnation? What economic reforms are necessary and which ones are envisaged by President Xi Jinping? These questions were discussed by Yao Yang, professor at the China Center for Economic Research and deacon of the National School of Development at Peking University, and Carsten Herrmann-Pillath, professor of economics at Witten/Herdecke University.

Despite the tailing off of economic growth, Chinese researcher Yao Yang is optimistic about the future of his country: "The strong upturn in the US economy and the recovery in the EU – with Germany as a powerhouse for growth – will boost Chinese exports and therefore overall growth in the country," says Yang, who is currently a Richard von Weizsäcker Fellow at the Robert Bosch Academy in Berlin. Carsten Herrmann-Pillath is more skeptical. He argues that other data already points toward a sharp fall in domestic demand. "The outlook is particularly gloomy among the younger generation. Many of them are worried about not being able to find a good job in the future and are reducing their consumer spending as a result." If prices were to fall due to a lack of demand, he believes this could – in a worst-case scenario – lead to deflation. Yao Yang does concede that this would indeed be a dangerous situation. Comments made by Prime Minister Li Keqiang at this year’s World Economic Forum in Davos, however, leave him feeling confident that the government would implement adequate countermeasures.

But what use are vague economic indicators to ordinary people? If there is no medium-term improvement in the income and social situation of vast swathes of the population, such as the country’s roughly 250 million migrant workers, then they will save rather than spend. As a result, Herrmann-Pillath argues that the government needs to invest more in social security. He argues that the population becomes disgruntled whenever "wealth is unfairly concentrated among a small and powerful elite." He believes this is one of the reasons why the government has launched an anticorruption drive. In his view, the question is whether this is merely a measure to maintain political control or whether there is a genuine desire to implement new rules against nepotism and cronyism.

Following Germany’s Example

Yao Yang also highlighted social inequality: "Everyone thinks that China is a rich country, but 30 percent of the population still lives in poverty." Although he doesn’t think that this inequality will lead to political instability anytime soon, he does warn that a failure to invest in the education of migrant workers in the long term could result in unrest that has ramifications for the whole country. As a result, he argues that China should base its approach on the German model of a social market economy and dual educational system. "We have to train our young workers better and qualify them to use new technologies."

Carsten Herrmann-Pillath believes that it will take more than macroeconomic reform, such as measures designed to boost domestic demand, to change China’s growth model. He regards institutional changes as vital. He contends that the role of the state has to be regulated more strictly in many areas of the economy, particularly in terms of the finance sector and nationalized companies. He doubts, however, that there will be any significant changes in ownership structure. Although Yang shares this belief, he also thinks that there will be changes in the way corporations are controlled. Instead of the state getting directly involved in company affairs, Yao put forward the opinion that it will either only hold shares or appoint executives to manage its interests.

He is also confident that President Xi will succeed in holding sway against powerful regional governments and critics in his own ranks to open up China’s economy further on the whole. He may even sign a bilateral investment treaty with the United States before President Obama leaves office in 2016. In Yang’s opinion, this would be a genuine revolution, as it would result in foreign companies being treated in exactly the same way as Chinese ones. As a result, they would no longer require a Chinese partner organization.

Hermann-Pillath is also convinced that the Chinese economy would benefit from more openness. In his opinion, the result would be highly competitive companies, outstanding analysts and advisory panels, and close ties between the government and the World Bank as well as other international organizations. He pointed out that many Chinese people already work abroad and that Chinese companies are globally connected. "If you want to get an idea of China’s competitiveness, you only have to look at the way that the country has developed." He adds a note of caution, however, warning that small steps toward economic liberalization may not automatically give rise to democratic freedoms. "We shouldn’t expect too much," advises Herrmann-Pillath.

(David Weyand, February 2015)

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