China’s economic success is one of the most important events in the last century. Only a few countries in the world have lifted themselves out of poverty, while many are still suffering from it. China’s rise to higher levels of income in per capita GDP during the last 30 years has really established a “new China.” This astounding phenomenon, therefore, raises the question that many are concerned with, that is whether the Chinese model is applicable to other countries as well. As I see it, the Chinese model came about in a certain historic period and under special circumstances. China took a unique path that does not apply generally to other countries. It is left uncertain whether this path will lead China to become a developed country or not.
In 1978, the Third Plenary Session of the Eleventh Central Committee that called for the elimination of superstitions and false beliefs marked the beginning of China’s development, followed by Deng Xiaoping’s Southern tour speeches on deepening reforms in 1992. The way for massive reforms was paved. Before that, China underwent the Cultural Revolution, a sociopolitical catastrophe that lasted for ten years. Without the Cultural Revolution, perhaps the Chinese people would never have come to the realisation that false beliefs and seclusion would lead to disasters. Looking at it in retrospective, the three decades following the reform and opening-up policy were the only period of peace and construction since the first Opium War in 1840. In the past, China was either bullied by foreign countries, or led to chaos by its own people. The enthusiasm for constructing a new country grew in this period, and morale was high. This period is rare in China’s history, as well as in world history. Therefore, it is not likely to for other countries to copy the Chinese way of development.
A series of accidental factors contributed to the rapid development of China over the last three decades, which also makes it impossible for other countries to copy its model. China is a highly centralised state where the government holds massive resources. If the leaders misuse such resources, disasters will occur. On the contrary, if the leaders of China act in a rational way, these resources can be put into good use in order to promote economic growth. This condition is rarely seen in other market economies. Taking the construction of infrastructures for instance, the market is capable of conducting it over time, but it can take very long. If we compare the achievements in generating electricity and constructing transportation infrastructures in China and India, the conclusion can be drawn easily. Electricity and transportation are the most critical infrastructures. There has been a lack of electricity and transportation in India (as well as in Egypt, the Philippines, Pakistan, etc.) for decades. Even today, luxurious hotels in New Delhi still need auto-generators for power backup, whereas China has never suffered from power shortages or transportation shortages. [Page]
What differentiates the countries is the subject of construction, whether it is the state or the individuals of the market that conduct the construction. Infrastructures involve high transaction costs from beginning to completion, concerning matters such as the acquisition of land and the various fees. It has become a habit for the Indian people not to pay for electricity and train rides. It takes huge amounts of transaction costs to persuade them to pay. The market is hand tied. In democracies like India, the fate of the government lies in the hands of the citizens, which makes the government unwilling to push its citizens. However, in China, people have to pay for their electricity and train rides. China is also leading in the construction of roads. China has accomplished a total of 120,000 km of highways by the end of 2014, while India only has a total of several hundred kilometres of highways. If large supermarkets and shopping malls are counted as infrastructures, then India lags far behind, as there are only street vendors and small shops. There are countless shops and stores in China’s cities, even in towns and villages. Supermarkets are built on credit, with fixed prices and no bargaining possibilities. As buyers are sure not to be tricked, supermarkets facilitate transactions and save transaction costs. The emergence of supermarkets has changed the image of traditional businesses. However, India is still learning in this regard.
Why is the Chinese government able to carry out large-scale construction projects of infrastructure while other countries aren’t? The answer is simple, the Chinese government is rich. Normally, democratic countries are poor, some are even under heavy debt. They lack the power to undertake costly construction of electricity and transportation infrastructures. Where does the money of the Chinese government come from, then? We have to take a look at the distribution of the national income. We learn from economics that the gross domestic product created by the people of the country is distributed among the factors labour, capital, and resources (primarily land, also mines). The labour income is the salary, or wage, which goes to individuals. The gain of the capital refers to interest and profits. In China, there is state-owned capital (state-owned enterprises, SOEs), and private capital (private enterprises). The gain of the state-owned capital goes to the state. In other private ownership based countries, the proceeds of assets go to the citizens. Therefore, most of the profit on assets is possessed by the state in China. This is the reason why the Chinese government has so much wealth at disposal.
The fact that the Chinese government has a lot of money and the citizens get a comparatively smaller share of the profit on assets determines many features of China’s economy. The first feature is the high savings rate, or the very low consumption rate. Most of the citizens’ income goes to consumption. If the income of citizens is low, then the consumption rate should be low as well. Most of the government’s income goes to investment (deriving from savings). And if the government’s income is high, that means there is high investment. Now that China’s savings account for almost half of its GDP, China is never short of funds during its economic takeoff. Construction sites are seen everywhere, which showcases the power that drives China’s growth. In other developing countries, there is usually a lack of funds, whereas China is an exception. What underpins this is public ownership. High investment is plausible in the early period of development. However, when a country steps into a middle-income level, problems such as overcapacity will come about as a consequence of high investment and low consumption. It has been a feature of China’s economic conundrum that the products resulting from investment are not consumed properly by the consumers. [Page]
Public ownership is best shown in the large SOEs in China. These SOEs occupy critical sectors of the economy with administrative power to form monopolies, such as in the financial sector, in electricity, oil, telecommunications, and transportation. These SOEs are generally less efficient than private enterprises due to a lack of competition, but they make huge profits thanks to their monopolistic status. In addition, the huge profits are seldom turned over to the state, sometimes 10%, and it is said that they should fork up 30% of their profit to the state by 2030. As the most profiting sectors are mainly dominated by SOEs where private assets are not permitted to enter, the vast private assets flow to the comparatively open housing market due to lacking investment opportunities. This has led to massive unoccupied houses all around China. These houses are not constructed to meet the demand of consumers, but to be a method of investment and value keeping. As a result, a terrifying housing bubble has emerged.
The housing prices in China’s large cities are 50% higher than in high-income countries. The cost of houses consists of land, construction, and human labour. If these factors are sufficiently supplied, especially land, then it is possible to suppress the rapidly increasing housing prices. Due to the distortion in the market for land, the price of land is high. There’s only auction in China’s land market, that is the competition from the demand side, and no bidding, that is competition from the supply side. That is because there is only one provider of land in China that is the government as the owner of land. Thanks to the incomplete land market, the use of land is irrational. For example, there are big sections of farmland in flourishing cities, shabby and plighted residential blocks among extravagant commercial buildings, and there are skyscrapers far away from the city centre without elementary commercial and living facilities. These are so commonly seen in China that people got used to them. Premier Li Keqiang determined to activate the land market but to no avail due to the barrier set by the public ownership of land.
Thanks to the monopolies of state ownership, China’s financial market is also uncompetitive and inefficient. Chinese banks own public capital while private capital is forbidden to enter. In addition, the financial sector set favourable measures for SOEs, which limits the rational use of capital. This in particular has led to the coexistence of high-interest loans and low-interest loans. The interest rate for unofficial loans amounts to 30% and beyond (annual interest rate), whereas the interest rate in banks is only 8%. However, these low interest loans are only lent to SOEs and quality borrowers. It is impossible for ordinary citizens to obtain such loans. What they can do is borrow from underground financial markets. As the liberalisation of interest rate has been promoted for years, it is critical to correct this inappropriate fund distribution. The fundamental solution is to open the financial market to the common citizens in order to promote fair competition. Now that Premier Li Keqiang has set out to solve the entry problem of private capital and permitted a few private banks, the development is slow. [Page]
The utilisation efficiency of the three main factors, labour, capital, and resource, is high in China. What led to this is a lack of powerful labour unions and of a complete social welfare system in China. The Chinese market is quite liberalised. Due to the public ownership, the utilisation of other capital and resources in China differs largely in comparison to Western countries. There are, however, advantages and disadvantages to the public ownership in China. In the early stages of construction, sustained and sufficient investment by the state can avoid the bottleneck of insufficient infrastructures in order to guarantee rapid economic growth. However, the side effect is the overcapacity in the middle and later stages of development where the large investments do not benefit the citizens and raise the consumption, which leads to a self-repeating circle of investment. Such an economic structure fails to lead China to a high-income country, which is worrying.
Therefore, it is urgent for China’s economy to undertake structural reforms in order to adapt to the new situations in the long term. This economic restructuring should start with the distribution of GDP to direct more of the wealth created by the people to the common citizens instead of the government. This will also help to promote consumption and decrease investment to avoid overcapacity. Only when the ratio of investment and consumption in the national income is shifted will the economic structure be shifted to a pattern that encourages consumption.