China has been experiencing fastest GDP growth rate (not less than 10 percent) for the last two decades, but global financial crisis emanating in 2007 has resulted in gradual reduction in growth rate, which in recent years has gone down by 2 to 3 percent causing adverse repercussions on its current account surplus also which in the past had hovered around 10 to 12 percent of GDP, but of late it has gone down to 3 percent of GDP.
Apart from global financial crisis, it is diminishing share of capital and labor as compare to use of latest technology in Total Factor Productivity (TFP). Marginal product of capital is diminishing or in other words manufacturing sector is taking more and more investments, but return is continuously diminishing. Similarly in case of labor of migrant workers from rural areas, which remained high during last two decades reached peak level and manufacturing sector due to high labor cost was reluctant to absorb marginal labor. As such total factors productivity (TFP) started going down.
In order to arrest this tendency rebalancing strategy started with priority of migrant labor to work in service sector so as to sustain rising trend of household income essential for increasing consumption level as a whole, which in recent years had fallen to 34 percent of the GDP. Accordingly Chinese government has opened service sector to competition. On the other hand government has liberated rural urban migration policy giving flip to ‘urban revolution’ as a part of rebalancing strategy enabling educated rural youth to get absorbed in highly paid jobs of service sector in particular.
Chinese Premier Li Keqiang has set a target of granting urban residency to around 100 million rural people. According to special report on China published in ‘Economist’ of 19th April 2014 “China’s cities will be home to close to one billion people or about 70 percent of the population compared with 54 percent of today”.
To enable local government to accommodate and provide social services to new entrants in cities steps have been taken to enhance local government revenues. Most important being allocation of major share of property tax collected to local government to provide a stable source of revenue. Secondly a major chunk of public sector enterprises’ profits to be set aside to ensure funds for public spending on education, health care and environment protection at local bodies level in addition to what is set aside at central level for social sector funding needs.
Liberalizations of Chinese financial system is yet another reformatory approach towards rebalancing of economy.
In line with major economies China’s central bank kept interest rate below or near the inflation rate, which is almost close to zero interest rate and is disincentive to small savers and subsidy for investment by firms and local government. In order to safeguard the interest of house hold savers government has removed bar from invent of shadow banks-non banking institutions, which ensure higher return for savers and high cost loans for risky businesses and individual borrowers. These shadow banking products are now being marketed by commercial banks and resultantly in some financial institutions ratio of bad debts has increased enormously on account of heavy financing done to risky businesses.
To prevent losses accruing to banking sector due to unscrupulous lending resulting in losses to savers, deposit insurance scheme has been introduced, which in course of time will separate prudent commercial banking business from risky shadow banking. Further there is a move on the part of central bank to liberalize interest rate within two years time. Similarly move to liberalize bond and stock market is yet another step to give access to small business firms to capital markets.
Apart from above reformatory steps taken by Chinese government for rebalancing their economy greater emphasis is being laid on making service sector more competitive.
Until recently public sector organizations had dominated modern services in finance information technology, media and telecommunication, but now service sector has been put to competition from private sector and international market.
For high productivity growth in service sector China plans to sell shares in more service firms as a part of move for privatization
China’s emphasis on less investment, more productivity growth in the long run through urbanization and creation of jobs for rural youth aiming for sustained increase in household income, will result in substantial increase in consumption. This model can be worked out in developing countries having agrarian economies including Pakistan where both indigenous and foreign direct investment are far lacking, hence Total Factor Productivity (TFP) is continuously on diminishing path, hence by changing factors of production ratio that is by reducing investment of capital and improving supply of skilled labor from rural and less developed urban areas for labor intensive industries at comparatively low cost and by deploying latest technology sustained economic growth can be achieved.
Under rebalancing program shift from investment towards consumption causing slow growth in manufacturing sector side by side accelerated growth in service sector will be beneficial for countries exporting manufactured items. They will be able to fetch wide export market on account of high production cost of China’s manufacturers. At the same time China will tend to import cheaper manufactured items from adjoining countries of South East Asia hence trading opportunities will be created within the region.
According to World Bank report as a result of rebalancing China’s exchange rate is being appreciated in real terms as it was being kept undervalued due to rapidly rising current account surplus. As such appreciation in exchange rate and rapidly rising labor cost has designated, China as high wage producing country and accordingly it is going to loose comparative advantage in manufacturing of textiles, garments, footwear and electronic items and resultantly a vast export market of these items will be passed on to other developing countries.
Pakistan can hope for wider direct export market of textiles items particularly designer cloths, shoes, hand bags and other leather goods. Pakistan having advantage of easy access to Chinese western border through land route it can export these products to rest of the world through China after value addition.
Other developing countries particularly in South East Asia and Far East can have export market share from China due to their gaining comparative advantage of low production cost. They can either export products of labor intensive industries direct to China’s buyers market particularly of USA and European countries or they can route their exports through China as a supply chain.
Abruptly rising labor cost particularly of garment making and footwear industry in China has given comparative advantage to various African countries also to boost up this segment of their manufacturing sector.
In Ethopia, Nigeria and other African nations where low cost labor and uninterrupted electricity supply and availability of other needed infrastructure has prompted not only indigenous entrepreneurs, but also business firms migrated from India, Gulf states and China to make heavy investments in garments and leather goods industries and accordingly have fetched sizable share of Chinese export market.
However in view of substantially larger trade surplus and China’s importance as having rising value chain reduction in its market share of direct exports will not effect it’s external economy; instead it will help improving investment climate in adjoining Asian countries and will indirectly ensure sustainability of economic growth of the region as a whole.
As a part of policy to cut down investment in manufacturing sector within the country and sustained high ratio of trade surplus to GDP will establish China as a main source of foreign direct investment for low income developing countries of Asia.
Country like Pakistan in view of long standing friendly relation with China is already in line of countries where China plans to invest particularly in energy sector.
(Author of this article is the former president of First Women Bank Limited)