But
this urban-based, export-led growth model also created more challenges
than it can now handle: property bubbles, traffic jams, pollution,
unsustainable local government debt, land-related corruption, and social
unrest related to unequal access to social welfare. As a result, a
shift toward a new consumption-based growth model – one that emphasizes
stability, inclusiveness, and sustainability – is at the top of China’s
agenda. China is searching for a new “growth order” for its restlessly
expanding cities.
The current economic-growth model considers the configuration of key factors
of production – land, labor, capital, and total factor productivity (a
measure of efficiency). But this narrow focus on output neglects the
economy’s human dimension – that is, how growth affects ordinary Chinese
citizens’ lives.
A growth order, by contrast, implies an emphasis on the configuration of sociopolitical and economic institutions
– including norms, procedures, laws, and enforcement mechanisms – to
achieve social objectives, such as improved living standards, a
healthier natural environment, and a harmonious and innovative society.
The
growth order’s stability will depend on institutionalized and effective
coordination between the state, the market, and society – a major
challenge, given the divergent interests within and among these groups.
But, more important, much of the growth order’s effectiveness will
depend on the relationship between the central and local governments in
the delivery of public services for the market.
Indeed,
contrary to popular belief outside China, the Chinese state is not
monolithic; it is a highly complex bureaucracy with many layers of
government and quasi-government institutions that do not always conform
to central directives. The central government is in charge of national
or systemic interests, deploying legal, regulatory, and broad monetary
and fiscal policies to achieve its ends. But the state interacts with
private enterprises, individuals, and civil society mainly through local
governments and local offices of national regulatory agencies.
A
distinctive feature of the Chinese growth order is that local
governments compete actively against each other for jobs, revenue,
investment, and access to fiscal and human resources. This is because
local governments’ leaders are appointed centrally, and, until recently,
promotion has been based largely on the ability to generate GDP growth
at the local level, leading to over-investment in the economy as a
whole.
Hence,
the interplay between local and central governments is complex,
particularly in terms of revenue sharing and responsibility for
providing public services. Although the central government may be
committed to reforms, implementation at the local level can be very
uneven, owing to parochial and vested interests.
For
example, since 2008, when the central authorities tried to boost growth
to combat the global crisis, local governments expanded their
investment capacity through shadow-banking vehicles that sought to
circumvent restraints on bank credit.
Because
local governments receive 50% of total national fiscal revenue, but
account for 85% of total fiscal expenditure, they try to supplement
their budgets through land sales. In 2012, Chinese local governments
received ¥2.9 trillion ($475 billion) in revenue from land and property
sales, compared with ¥6.1 trillion in other local revenue.
Compared
to the private sector, local governments and state-owned enterprises
tend to have access to significantly cheaper funding, with the gap
between official interest rates and shadow-banking borrowing costs
reaching as much as ten percentage points. Cheap funding and land
revenue have led to excess infrastructure and industrial capacity
without adequate market discipline. From 2008 to 2012, fixed-asset
investment in China amounted to ¥136 trillion, or 2.6 times more than
the country’s 2012 GDP.
Rebalancing
the economy by shifting toward domestic consumption and avoiding
over-investment will require major fiscal and monetary reforms, as well
as structural reforms to delineate land-use rights more clearly. It will
also require revising the framework for revenue sharing between central
and local governments, as well as transparency in local-government
finance.
These
reforms stand at the center of the state-market debate, because the
private sector, caught in the complex interplay between central-local
power sharing, can easily be crowded out. Thus, creating a new growth
order requires the central government to align institutional structures
and incentives so that local governments and the market can play to
their strengths. The market must be allowed the space to innovate, while
the state must implement the necessary institutional and procedural
reforms. Striking the right balance between market-based product
innovation and state-led institutional innovation will be the main
challenge that China faces in the years ahead.
Andrew Sheng, President of the Fung Global Institute, is a former
chairman of the Hong Kong Securities and Futures Commission, and is
currently an adjunct professor at Tsinghua University in Beijing. His
latest book is From Asian to Global Financial Crisis.
Xiao Geng is Director of Research at the Fung Global Institute.