China faces new challenges to maintain growth and development

Shen, who is managing director and chief economist of Mizuho Securities Asia, said China’s economy did not crash because, in the last quarter of 2012, it enjoyed fierce domestic demand from better-paid workers, while its leaders went on a public construction spree.

While domestic consumption will remain strong, and so help counter sluggish demand elsewhere, Shen warns that any growth spurt from the government’s continued infrastructural investments will not last.

He points out that banks are already delaying the approval of loans even as residents protest publicly that over-building is ruining their surroundings.

Meanwhile, up to 32 per cent of its factories are lying idle from over-expansion, a fallout fuelled by the government’s stimulus packages in 2009 and 2010, he says.

On top of that, he notes, many manufacturers are pulling out of China and going into Southeast Asia instead, especially Indonesia. This is because wages are rising in China, with even migrant workers enjoying a 13 per cent pay rise last year. Still, says Shen, the Chinese are “more optimistic” about this year, as their new leaders have said in recent weeks that they will roll out very difficult reforms.

Shen is more circumspect about China’s rebound from its slowdown last year. He says that it will probably grow minimally more than the government’s target of 7.5 per cent this year, but nothing is certain after that because China has not yet cracked a way to move up the value chain.

University of California professor Woo Wing Thye, author of the book A New Economic Growth Engine For China, suggested that China would achieve most progress from undertaking three huge reforms:

First: overhaul its financial sector by setting up small banks to lend money to individual entrepreneurs. This would create vibrant small and medium-sized enterprises that would churn new economic activity and break the stranglehold of China’s many monopolistic state-controlled companies.

Second, China’s new leaders can “give something back to farmers” by reforming land policy to let them own land. That is a big task, he noted, because local officials see land privatisation as taking power away from them, and so would likely retaliate by allocating undesirable plots to farmers.

Third: China should polish its diplomatic skills and get on better with the rest of the world. “To be truly rich, you have to trade with the whole world, and when you are a relative outsider, you have to have superb negotiation skills to boot,” he said.

In the meantime, Shen notes that China’s growth headaches will actually benefit Southeast Asia because its public and private companies are keen to expand in the region.

Economist Chua Hak Bin of Merrill Lynch in Singapore says the Chinese will be joined by Japanese manufacturers, who are pulling their money out of China after strident protests there last year triggered by Japan’s unilateral decision in September to “nationalise” the Diaoyu/Senkaku islands, which China also claims as its own, by buying the three isles from private owners.

Regarding China’s assertiveness towards Japan over these islands, Peking University’s international studies professor Zhu Feng says that Beijing is merely reacting to Tokyo’s renewed territorial claims, so the Chinese response had not been “strategically weighed”. He adds that China’s new leaders are “more nationalistic” than their predecessors but not necessarily more hawkish.

Institute of Southeast Asian Studies senior fellow Ian Storey, however, stresses that the Diaoyu/Senkaku dispute is by far the “more dangerous” of China’s two sea spats, as it is between “two well-armed countries with historical animosity”.

“Last year,” Storey told delegates, “I asked the chief of the Japan Defence Force what conflict resolution mechanism he had with the People’s Liberation Army, and he said, ‘None’.”