China must address institutional reform to sustain high quality growth

Professor of International Finance comments on China's growth strategy and how it could help its economic recovery from the pandemic.

The coronavirus pandemic has provided a stern examination of global economies, with a squeeze on healthcare systems, productivity and supply chains among many areas.

With vaccination rollouts heavily underway in a lot of the world’s largest economies, attention is beginning to turn towards how each individual nation tackles the challenge of its economic recovery after months of uncertainty. A particularly interesting observation is the difference in early approach between China and the USA.

Professor Kate Phylaktis, Professor of International Finance and Director of The Emerging Markets Group at the Business School (formerly Cass) examines China’s growth strategy and whether it is comparable to that of the USA.

The state of play

Professor Phylaktis believes China’s response indicates a long-term package of sustainability as it seeks to recover from its weakest economic result in decades.

“The US economy is pursuing expansionary fiscal and monetary policies to the point where there are fears of inflation rising.

“On the other hand, China is concentrating on more long-term growth policies, possibly because its economy actually managed to grow by 2.3 per cent during 2020. In doing so it was the only major global economy to achieve gains for the year, although it was the weakest result in decades.

“Optimism was furthered when China’s Premier Li Keqiang announced a target for economic growth above six per cent, while the IMF’s estimate is 8.1 per cent, marking a strong bounce back so soon after the pandemic.

“Early indications suggest that despite these targets, Chinese authorities are hoping for higher quality of growth rather than speed – including policies for the creation of new urban jobs, a new three child policy to curb an aging population and foreign investment legislation overhaul to attract a higher volume of overseas income.”

How do China and USA compare?

In spite of the fact that China and USA are two of the world’s leading economic powers, Professor Phylaktis said that they should not be compared because they are at different stages in development.

“It is difficult to compare the two in terms of their strategies.

“Although China is now an upper-middle-income country according to the World Bank, it is important to focus on alleviating poverty moving forward and addressing vulnerabilities faced by a large number of people still considered poor by the standards of middle-income countries – including those living in urban areas.”

How is China’s economy changing?

“China’s high growth in previous years was based on resource-intensive manufacturing, exports and low-paid labour, which has largely reached its limits and has led to economic, social, and environmental imbalances. Reducing these imbalances requires shifts in the structure of the economy from low-end manufacturing to higher-end manufacturing and services, and from investment to consumption.

“In the last few years, growth in China has slowed down in the face of structural constraints, including declining labour force growth, diminishing returns to investment and slowing productivity. The challenge going forward is to find new drivers of growth while addressing the social and environmental legacies of its previous development path.

What actions should China be taking now?

Professor Phylaktis believes China needs to bring its economic growth strategy in line with updates to reforms and changes in its development.

“China’s rapid economic growth exceeded the pace of institutional development, and there are important institutional reforms and gaps that it now needs to address to ensure a high quality and sustainable growth path.

"The role of the state needs to evolve and focus on providing stable market expectations and a clear and fair business environment, along with strengthening the regulatory system and rule of law to further support the market system.

“According to the World Bank, China should address some of its remaining development challenges such as the transition to more environmentally sustainable growth, strengthening key Chinese institutions engaged in economic and social development and reducing inequality in lagging regions.

“The Wold Bank has also recommended that China focusses its attention on the following areas:

  • Advancing market and fiscal reforms by improving the environment for competition and private sector development, and achieving more efficient and sustainable subnational fiscal management and infrastructure financing.

  • Promoting greener growth by reducing air, soil, water, and marine plastic pollution, by strengthening sustainable natural resource management, promoting low-carbon transport and cities and facilitating the transition to a lower carbon energy path.
  • Sharing the benefits of growth by increasing access to health and social services and improving the quality of early childhood development.

“Concentrating predominantly on whether China adopts similar financial policies to the US to judge its post-pandemic economic future is not the right way to go, nor is It useful to pay too much attention to China’s policy on the renminbi (China’s currency) as this is part of achieving short-term goals rather than a long-term vision.”

All quotes should be attributed to Professor Kate Phylaktis, Professor of International Finance & Director of The Emerging Markets Group at the Business School (formerly Cass).

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