China examining its Growth Model

1. Seeking Alpha – Michael Pettis – When Will China Emerge From The Global Crisis?

I have always thought that the least painful way for China to rebalance its economy requires that it radically redistribute income and wealth away from the state sector and to the household sector. There are many ways this can happen, some better and some worse, but privatizing SOEs and using the proceeds to clean up the banks (whose NPLs are a future claim on households), to shore up the social safety net, and to permit SME’s more scope in which to compete is, in my opinion, the most efficient ways to do so. It would also weaken sectors that are able to restrain change in the economy.

A lot of very smart people in China seem to be worried that the country’s governance structure and its development model are no longer able to accommodate the needs of the economy and that it is vitally important to confront the entrenched interest that make change difficult. This is sometimes presented in the foreign press as the debate between the “Chongqing” model versus the “Guangdong” model.

2. Caixin online – Interview with Liu Mingkang, former chairman of the China Banking Regulation Commission

First, domestic and external demands have taken a sharp drop, especially in the second half of 2011 and first half of 2012. I think that the pressure to increase domestic demand is picking up. That is because domestic demand is driven by business productivity.

Right now, business costs are rising. The cost of raw materials rose to between 5 and 10 percent of costs in 2011, labor costs to 25 percent, and finance costs to 50 to 60 percent. Leverage rates vary from industry to industry, but are usually above 50 percent. They are at that level due to rising interest rates and exchange rates. The yuan’s exchange rate was on the rise during ten months of 2011. Only in recent months has its value begun to drop slightly.

These three factors had three results in 2011: business profits were down, losses were up and per capita income was hurt. The government came up with many measures to protect the lowest income population, but the consumption capacity of low-income citizens is limited. Demand on the part of middle- and upper-classes is dropping, especially in middle-class families. Everybody’s attitude is “let’s wait and see.”

Second, there will be even more pressure to change our development path in 2012. For example, there will be pressure on the steel, auto-manufacturing, ship-building, textiles, machinery and other industries. Industrial structures will be further adjusted in 2012. We urgently need to transform our business development models. It has become a choice between life and death.

Third, it’s hard to be optimistic about employment and stability. If some businesses evaluate market conditions and choose to close up shop or cut half of production, especially in the first half of 2012, there will be employment problems for migrant workers after Chinese New Year.

Fourth, after ten years in the WTO, China’s reliance on exports is relatively high. China is greatly affected by changes in the global economy. Commodity prices fluctuate rapidly, impacting China’s economy directly. It’s also worth paying attention to capital flow trends. In the third quarter, net inbound capital flow became capital outflow. It’s possible that such an exodus will continue into the first half of 2012.

I have faith in our situation in 2012.

First, the Chinese economy has grown stably and quickly these past few years. We’ve built a good foundation to withstand risk. Even though the slump in our economic growth is basically equivalent to the drop happening in the rest of the world, our base growth rate is high, so we can withstand the tests.

Recently Chinese economic growth rates have fallen from 11 percent to about 9.2 percent in 2011. It has been predicted that our GDP will grow about 8.3 percent in 2012. But after all, that’s still about 8 percent growth, which from a global perspective is not too bad. Our country has accumulated a certain level of material wealth and growth impetus as a result of our economy’s sustained, fast growth.

Second is that China’s treasury and tax collection systems are particularly healthy. We’ve already far surpassed tax income projections from the beginning of 2011. Increases to tax income are approximately three times greater than GDP growth. Income from both central and local tax authorities has been solid across the board, whether in terms of growth or total amounts. This has given us the ammunition we need for the next round of economic growth and restructuring.

Third, we have financial stability. As seen in the banking industry, capital is now relatively abundant, and profits are good. The return on assets of Chinese banks has remained steady at about 1 percent, and return on equity 15 to 20 percent. That’s an extremely good standard from a global perspective. It looks likely that these rates will hold steady in 2012. Thus, Chinese banks will have a mechanism by which to replenish capital and sustain development.

If you liked this article, please give it a quick review on ycombinator or StumbleUpon. Thanks