/Article on partial completion of the course: International Competition and Policy/
China, the country of
immense potential and prospering economy, outruns most of the Asian countries
in terms of manufacturing, having per capita production by almost one half than
the average of remaining countries in Emerging and Developing Asia. The country
still keeps its fast pace of growth, at 6-7 percent per year. According to the
WEF’s categorization of development stage, the country is currently on the third
stage of total five, an “Efficiency driven economy”. Due to its large supply of
cheap labour and continually evolving innovation in business and technology,
the country obviously has its comparative advantage in manufacturing.
Briefing
on China’s rankings in Competitiveness
Table 1 shows the rankings
of China within the competitiveness sub-indices. Ranking at 28 in terms of general
economic competitiveness, China’s lowest score was on innovation and
sophistication factors, with China being listed at 33, sub index rankings with
43 in Business sophistication and 32 in Innovation. The Basic
requirements index consists of 4 independent indices for the 4 “pillars”
for a country to be in good condition. Within these pillars, China ranked in the
first 10 in Macroeconomic environments, which reflects the fast economic
growth, foreign trade, low inflation and production. In terms of Efficiency
enhancers, which is the third sub index in the general competitiveness, China
ranks at 30. Emphasis should be given to the Market size ranking: second
with only US in front. The rankings are generally higher than the rest of Asian
emerging and developing countries.
Table 1. Rankings in sub
index categories and pillars
Sub index
|
Rank
|
Pillars
|
Rank
|
Basic requirements
|
28
|
Institutions
|
47
|
Infrastructure
|
46
|
||
Macroeconomic environment
|
10
|
||
Health and primary education
|
46
|
||
Efficiency enhancers
|
30
|
Higher education and training
|
65
|
Goods market efficiency
|
56
|
||
Labor market efficiency
|
37
|
||
Financial market development
|
54
|
||
Technological readiness
|
83
|
||
Market size
|
2
|
||
Innovation and sophistication factors
|
33
|
Business sophistication
|
43
|
Innovation
|
32
|
Financial
asset perspective
According to the Allianz
SE Report, financial asset of private households in Asian countries rose more
than 10 percent, holding almost half the financial asset held throughout the
world. The financial asset holdings in China was the biggest contributor, with
23 percent of growth. Though the high growth increased the share of China’s
financial asset in the region to 36 percent, the “old-rich” Japan still
persists as the richest nation in Asia in terms of financial wealth, without
mentioning its share in the last year was large at 51 percent. According to
Allianz forecast, if this growth continues, China should replace Japan by next
year.
Another way of looking at
financial holdings is the distribution of financial wealth. According to the
Gallup institute of economic research, China’s financial welfare is
considerably high comparing with the tiger nations in Asia. In terms of
equality, one quarter of the population is thriving while another quarter is
suffering in terms financial wealth. Thus, comparing across urban and rural
regions, there is still significantly unequal financial distress.
Productivity
According to The
Economist, whether China’s growth is due to high productivity or large supply
of production factors is problematic. Since as long as the increase of capitals
and labour is more than the decrease in productivity, the economy will be
growing, which might be the case of China. We cannot see explicitly whether arbitrary
worker’s productivity is increasing or decreasing, so economists estimate the
Solow residual. Several economists’ estimation resulted with a bad news for
China. Productivity growth has decreased across several estimates from World Bank
and the local analysts. As an example for these, World Bank estimated that TFP
growth in China by 2000-2010 has fallen by 40 percent comparing to its 1990s.
Graph 1. Total
productivity in China /in RMB, fixed price of 2000/
Data source: Measuring Chinese
Productivity Growth (2006), OECD
Looking at the graph 1 and
2 above, even though the productivity has been increasing in absolute terms,
the percentage growth is starting to fall by 2004 and 2005. This supports the
above mentioned conclusion that productivity growth in China is starting to
fall. But since, due to data insufficiency, the graph doesn’t show the data for
2006 and further until now, it is inconvenient to make hasty conclusion based
on this.
Another evidence
supporting this is that China’s workers are least motivated in their work. This
result is postulated from the Gallup institute[1]
mentioned above, and they used data on performance, productivity, tenure etc.
in determining the relationship. They even concluded that only 6 percent of
workers in Chinese companies are fully engaged to their work.
Graph 2. Total
productivity growth in China
Data source: Measuring Chinese
Productivity Growth (2006), OECD
Investment
vs. Productivity
One of the main reasons
for this deceleration is bad investment and lending. Though China’s debt level
increases fast (according to Allianz SE, at 23 percent in 2014), the allocation
is not optimal. Analysts from the Bank of China even found that there was a
strong negative correlation between growth in lending and factor productivity.
This highlights the fact that financial wealth, not distributed smartly, might
not be as effective as expected.
Moreover, China’s
credit-to-GDP grew at high rate since the crisis of 2009 (at 58 percent) and
now the total ratio of debt-to-GDP stands at 200 percent. The majority of the
loans held is domestic, mostly owned by state-owned companies lending from
state-owned banks[2].
Though it might mitigate the worry of going default, there’s still a question
of whether the high borrowing level is allocated effectively to the productive
sectors at micro level.
Therefore, financial
sector development is essential in efficient allocation of current wealth for
creating the future wealth. “Financial sector’s development should promote
growth by improving allocation of resources… China lagging behind in productivity
is an indication that state-owned banks, which still dominate China’s financial
sector, are not disbursing enough credit to the country’s most deserving
companies. And the economy is consuming more and more capital” writes The
Economist. Another fact confirming this notion is that the Incremental capital
output ratio rose to 5.4 in 2012 than 3.6 of two decades ago[3],
meaning that the amount of investment required for achieving one percentage
point increase in economic growth has become higher, indicating worsened
investment efficacy.
Conclusion
Though abundant in labour
and capital supply, efficient and quality production is essential to long-term
sustainable growth. In order to support industries that suggest efficient
allocation of resource, it is the role of financial sector to identify the
innovative industries and lend them the start-up investment, for initializing
their operation. For China, though productivity level is higher in comparison
to most developing countries, the productivity growth is slowing while debt
level is increasing. Thus, this brief summary suggests that it is important for
China’s financial institutions to be able to recognize enterprises with high
productivity and provide them with the start-up funding.
REFERENCE
“Allianz Global Wealth Report 2014”, Allianz
“China’s debt-to-GDP level”, July 14th 2014, The
Economist: http://www.economist.com/blogs/freeexchange/2014/07/china-s-debt-gdp-level
“The Global Competitiveness Report 2014-2015”, World Economic Forum
“World wide, only 13 percent employees are engaged to work”, Oct 13th
2013, Gallup institute: http://www.gallup.com/poll/165269/worldwide-employees-engaged-work.aspx
“Unproductive production”, Oct 11th 2014, The Economist: http://www.economist.com/news/finance-and-economics/21623708-weakening-productivity-casting-doubt-sustainability-chinas
[1] Gallup institute: http://www.gallup.com/poll/165269/worldwide-employees-engaged-work.aspx
[2] The Economist: http://www.economist.com/blogs/freeexchange/2014/07/china-s-debt-gdp-level
[3] The Economist: http://www.economist.com/news/finance-and-economics/21623708-weakening-productivity-casting-doubt-sustainability-chinas
