How China Should Navigate Through the Economic Challenges

How China Should Navigate Through the Economic Challenges

Date: Nov 23, 2023

During a recent interview, Prof. FAN Gang, President of China Development Institute, provided perspectives on the development of large enterprises, insights on the importance of fostering private enterprises and how China should navigate through the economic challenges that it faces now.

Synergies and Challenges in Diverse Business Scales

Businesses of all scales have the opportunity to innovate in a variety of ways. While small businesses may specialize in specific technological fields, they often struggle to achieve systematic technological development. On the other hand, large enterprises tend to integrate multiple technologies to create more comprehensive products. The large enterprises play a distinct and pivotal role in economic modernization especially within the innovation ecosystem, as they are able to catalyze a network of SMEs and integrate them into the innovation chain.

Furthermore, thanks to their ample capital and profits, large enterprises are able to make long-term, sustained investments into R&D, thereby propelling systematic and continuous innovation in fields like cloud technology and AI. Nevertheless, the key lies in establishing oligopolistic competition within the industry structure while averting monopolization, and ensuring ample space for innovation for SMEs.

Nurturing Private Enterprises for Economic Progress

When comparing China's private enterprises with state-owned enterprises (SOEs), significant differences exist. It is crucial to focus on the development of private enterprises as they are critical to China’s economic growth.

State-owned enterprises, due to their close ties with the government and other entities alike, exhibit weaker independence. Moreover, they operate under stringent institutional frameworks and scrutiny in decision-making, necessitating cautious consideration for the use of public funds and risk mitigation, thereby limiting their investment in innovation and capacity in risk-taking. In contrast, private enterprises are more responsive to market signals, showcasing greater flexibility and advancement in innovation. Meanwhile with their own capital at stake, the private enterprises bear the consequences and potential losses of taking risks to invest in innovation, which in turn brings stronger impetus for success. Therefore, in a market economy, private enterprises exhibit exceptional performance, particularly in high-tech industries.

Despite their significant role in the economy, large enterprises often face disadvantages in the market competition, especially with respect to financing, market access, and policy support. It is important to take a dialectical view of these realities and not adopt policies to suppress private enterprises. The future of China's economy lies in fair policies and programs that foster the development of private enterprises rather than transforming them into SOEs.

Navigating Through the Economic Challenges: Insights and Prospects

The biggest economic challenge that China faces at the moment is the insufficient demand which has led to a slowdown in economic growth. This situation is not the result of a single factor, but stems from multiple causes such as the impact of the pandemic on the industrial chain, unemployment and decreased expectations for income growth. However, stimulating demand has become particularly difficult in the current economic cycle. Hence, adept management during economic downturns is crucial for China. The government plays a key role in boosting demand, especially when private demand is insufficient, and government demand can serve as a supplement. Yet, inadequate future expectations among businesses and residents are also significant contributors to weak demands. Under such circumstances, the government should take more targeted measures to invigorate overall demand rather than just stimulate consumption. Addressing these challenges requires government wisdom and strategies to effectively manage cyclical economic fluctuations, and more importantly to guide the economy safely through downturns.

As for the future of the Chinese economy, international opinion suggests China might echo Japan's "lost 30 years". However, differences emerge when comparing the two, such as China’s current urbanization rate and overall economic development, and that of Japan in 1991. Japan was already a highly developed economy in 1991 with an urbanization rate of 77.4%, while China is currently at 65.4%. Therefore, China is still in a relatively stable growth phase rather than a continuous decline. Additionally, in terms of government debt ratios, the total debt ratios of China's central and local governments are similar to those of Japan's in those years, but China has huge amount of state-owned assets and a lower gearing ratio, which will provide more room to boost the economy once state-owned assets are utilized. Last but not least, the vigilance of China towards debt risks in both the financial and residential sectors far surpasses that of Japan during the corresponding period.

As a developing country, short-term economic fluctuations are normal. Although China is currently experiencing a downturn, it doesn't indicate the start of a long-term slump but is most likely a short-term fluctuation.