“Don’t be too optimistic about China’ s current miraculous GDP growth!”

This is the view of Zhang Jun, Professor at Fudan University and visiting professor at many world-renowned institutions such as the University of London, the London School of Economics and Harvard University. He argues that the potential economic boom will be handicapped by a number of underlying difficulties. He stresses that the private sector should play a more important role and that the protection of private property rights will probably be incorporated in the constitution.

This January, China had an unprecedented trade deficit of US$ 1.25 billion, which sparked considerable concern in many quarters. Is that an ominous sign? Professor Zhang clarifies the confusion and analyzes the future macro economic policy for us.

He says, “I think the deficit is due to the rise of the oil price and the decline of domestic demand in the beginning of this year. There is little chance that the trade deficit will last for long.” Professor Zhang also has strong views on China’s incredible GDP growth.

“In the past ten years, GDP has grown substantially while ordinary people’s income still remains at a relatively low level. Recent economic growth is attributed to the proactive fiscal policy, such as building more expressways and issuing more treasury bonds. These methods can, to some extent, promote GDP growth, but fail to exert any influences on the ordinary peoples’ disposable income. A great many high-rise buildings have sprung up, numerous expressways are under construction simultaneously, but ordinary citizens’ wallets haven’t benefited from that”.

The Professor adds, “the proactive fiscal policy is also the root of the excellent performance of the macro economy and the backward function of micro economy. This kind of economic growth is arousing concerns from many experts, because it’s not sustainable. The income level of ordinary people fails to grow, which leads to an insufficient demand. Then people feel increasingly eager to postpone the consumption or deposit in the event of the future expenditures, while the economic growth are more relying on the proactive fiscal polices. All this gives rise to a vicious cycle and consequently a series of headaches for the government.”

How the country can put China’s GDP growth on the right track still remains to be seen. Professor Zhang notes that “we have virtually approached the boundary of our economic system, which leaves us little space to maneuver. We should break down the barriers within the economic system in an attempt to develop the non-government sectors”.

Professor Zhang argues that great importance should be attached to the reinforcement of non-government sectors. Private entrepreneurs are encouraged to play a role while government investment and regulation gradually make fewer interventions. He argues, “we are in dire need of more and more people from the private sector, instead of from government, to drive the economy and even make the market. However we can hardly achieve that for the lack of the relevant systems. For example, if someone intends to start a business, he needs financial services, social welfare and medical insurance. Because of the backward system and insufficient service, even talented people are reluctant to set up their own ventures. Reform should focus on the relaxation of economic regulation and especially the financial resource. The role of financial sector should be transferred from regulation to service. Government should serve business, instead of regulating and restrict it”.

The lack of Chinese private investment leaves the market open for foreign companies, Professor Zhang notes. “On the one hand there is substantial government investment, on the other hand private investment contributes only a small fraction. Foreign investors grasp this opportunity and are eager to flock into China, because they don’t need the relevant service from Chinese government. We can see that the economic booms in the Yangtze River Delta and the Pearl River Delta are, to a large extent, attributed to the sustained inflow of FDI. Therefore China’s economy still has large scope to maneuver if restrictions are removed. Future economic development, to a large extent, depends on the reform of financial sector, personnel system, medical insurance and stated owned enterprises”.

Professor Zhang emphasizes,” it’s China’s second economic reform. To increase the de facto household income instead of nominal GDP growth should be put on the agenda of the top officials in China. It is related to various kinds of reforms, such as the reform of property ownership, the reform of state owned enterprises, privtization of economic system and the reform of chronic insolvent banks etc. It’s really a pressing task for Chinese government”

The Professor argues that new laws are needed. “It also involves legislation. Whether the private property right should be stipulated in the constitution is also a hot issue, which needs to be given top priority. We are now working with the government on this issue, on how to incorporate the protection of private property rights into our laws. In the absence of this protection, businessmen are reluctant to make investments and ready to withdraw their money, fearing the safety of their property. So we need to amend our constitution. Without these reforms, China will appear to be more economically advanced than it really is.

With regard to Shanghai, Professor Zhang believes the city should change from being manufacturing-oriented to service-oriented. As he says, “there is a divergence of economic structure between Shanghai and Beijing. The manufacturing industry is much more advanced than that in Beijing because Shanghai used to be a manufacturing center. Maybe Shanghai has cultivated more engineers while Beijing has turned out more senior talents such as software engineers and professional managers. However, Shanghai is now changing its function from manufacturing sector to high tech sector or tertiary industry. That is crucial for the city’s sustained development. As we can see, it has attracted numerous talented people to change the city’s function”.

He goes on “Shanghai’s competitive edge is not in the manufacturing industry because the labour cost in its surrounding areas is much lower than in Shanghai. In the future, the manufacturing industry in Shanghai will be upgraded from processing industry to high tech industries. In many big cities such as Shanghai and Beijing, the quality of service is very low compared with other metropolis. The opening of tertiary industry should be given top priority as well, such as financial services, hospitality industry etc. We can seldom find the foreign department stores in Shanghai, while a great many commodities in the U.S bear the inscription “Made in China”. It’s a pity because the service sector is a high value-added industry, which is much more lucrative than Bao Steel Co., Ltd in Shanghai. Foreign enterprises will definitely reinforce the competition in this field and competition is, by all means, conducive to the growth of service sector. The opportunities in service industry are also substantial for foreign investors”.

Vibrant economic growth in China has grabbed the global spotlight, but the underlying obstacles are still enormous and should be top of the government’s agenda. Professor Zhang’s cautionary words are food for thought.