Restructuring China’s economy for growth and liveability

At a recent news conference, Chinese Premier Li Keqiang said the government is focused on enhancing job growth and reducing air pollution. Indeed, China’s impending economic slowdown and severe environmental degradation make up the two most pressing issues that are currently on Beijing’s policy agenda. The causes of these issues point towards a pressing need for China to restructure its economy and wean itself off its export-led manufacturing-based model of growth.

As the first quarter of the year comes to a close, China is showing signs of a gradual slowdown. A slew of economic data shows that China’s manufacturing, retail and investment sectors have slowed down in the beginning of the year.

More importantly, this slowdown is likely to affect China’s ability to achieve its economic growth targets. The government has lowered its growth target for the year to 7.5 per cent, a slight decline from the 7.7 per cent growth achieved in 2013. This raises concerns over Beijing’s ability to maintain economic growth and consequences for other Asian economies.

These concerns are compounded by the fact that economic recovery in the United States and European Union remains slow. In response to current fears of a slowdown, Mr Li has said the government is not preoccupied with GDP growth. In other words, China is targeting a better quality of growth.

Major Chinese cities remain plagued by severe air pollution. According to a recent report by the Shanghai Academy of Social Sciences, hazardous levels of air pollution in Beijing have made the capital “barely suitable” for living. While air pollution is detrimental to the health of citizens, it also has negative implications for the economy. A degradation of China’s living environment is likely to deter the much-needed foreign investment and talent that are crucial for driving the country’s economy.

KILLING TWO BIRDS WITH RESTRUCTURING

While problems plaguing the Chinese economy and its urban liveability are indeed daunting, a clear way that Beijing can deal with its economic and pollution problems is through restructuring its economy.

In particular, there is a need to reduce its reliance on manufacturingand shift towards the production of exportable services. This can also help reduce factory emissions and air pollution. More importantly, China needs to diversify its economic base, as other emerging Asian economies with cheaper labour and lower rents establish themselves as new manufacturing bases. A corresponding shift towards higher-value-added services should allow Beijing to provide jobs in such services to citizens, promoting higher-quality job growth.

This is a process that other Asian Tiger economies, such as Hong Kong and Singapore, have gone through successfully. Both cities are now leading global financial centres and top locations for the establishment of headquarters by multinational firms.

HOW TO RESTRUCTURE?

The good news is that China has already begun diversifying its economy, albeit at an insufficiently brisk pace. For instance, the establishment of the Shanghai free-trade zone represents an important policy experiment in economic liberalisation. More importantly, it is a crucial first step in liberalising the yuan. Offshore yuan trade is already a booming business, with Singapore’s DBS bank expecting yuan bond issuance to reach 350 billionyuan (S$71 billion) this year.

China can continue to tap this burgeoning demand for yuan-denominatedinvestments by further developing markets for yuan bonds and futures. This requires working closely with Shanghai — its largest onshore yuan centre — and the offshore yuan centres of Hong Kong, Singapore and London.

Yet, as Hong Kong and Singapore have shown, developing new industries, such as the financial services sector, requires investments in human capital and the necessary legal regulatory infrastructure.

It is important to note that manufacturing remains a significant part of the Chinese economy and is likely to remain so for the foreseeable future. Hence, China should encourage cleaner manufacturing processes. This requires beefing up regulatory oversight and enforcement, as well as investing in necessary technological and productivity enhancements to current manufacturing processes.

To be sure, economic restructuring and upgrading of manufacturing processes are costly endeavours. However, they are necessary steps which Beijing needs to take to enhance long-term economic competitiveness and improve urban liveability. Given the important economic roles of major Chinese cities and China’s rapid urbanisation, competitiveness and urban liveability are inextricably intertwined and mutually enforcing.

The emerging problems of the 21st century will be increasingly intertwined. It is, therefore, a good time for the economic powerhouse to begin thinking about how it should restructure its economy in such a way that both economic growth and the interests of its citizens are not compromised.

ABOUT THE AUTHOR:

Woo Jun Jie is a researcher at the Lee Kuan Yew Centre for Innovative Cities, Singapore University of Technology and Design, where he works on issues of governance and leadership.