What's happening in China?

That's a question my friend in Houston often asks when we have our weekly telephone conversations.  Readers of this blog have asked why I haven't written more about China recently. So here are 2.5 items about China.

Item 1. This blog is blocked in China, so my old Danish friend Sven living in Chengdu in Sichuan can't read it unless I cut and past the posts into a normal email.  I don't think the Chinese government has identified me as a threat to their harmonious society. They tend to block almost all of Google's services other than regular Gmail and the blogger.com service I use is a Google platform. Perhaps I could try another blog host but it would likely be blocked as well.  The Great Firewall has meant that I can't use Google Groups and Google Docs to communicate with by Business School students,  some of whom live and work in "mainland"" China.  This is inconvenient as the university platform, which is not blocked, is not as user friendly.

Item 2. The Chinese economy.  I don't feel qualified to pontificate in writing on this topic so let me quote in full an op-ed piece from today's South China Morning Post, Hong Kong's major English language daily newspaper which is not subject to censorship by the Chinese government:

China's real worry is not the growth rate, but the structure of its economy

Hu Shuli says the widely acknowledged distortions of its
development model cannot be corrected without the political
will to go beyond pledges - and act
Updated on Sep 22, 2011
Once again, forecasts of gloom in the Chinese economy are doing the
rounds amid the continuing turbulence elsewhere. Premier Wen Jiabao's
assessment, made last week at the "Summer Davos" in Dalian , was timely.
He said the pace of China's economic growth had slowed after the second
quarter, as expected, and largely as a result of the government's cooling
measures.
Recent economic data confirms the slower pace of growth. If China is
making progress towards reducing its over reliance on policy stimulus for
growth, then less spectacular gross domestic product figures should not
unduly worry us. The real concern is with economic restructuring.
Shaken by the earthquake in Japan and power shortages on the mainland,
the Chinese economy experienced some unexpected fluctuations after the
second quarter. But GDP growth for the full year is still expected to top 9
per cent, so a slowdown is not a worry. What is causing the pace of
growth to ease? Instead of focusing on the short-term challenges, China
should worry about its longer-term risks, and whether the economy is
restructuring as planned.
In the 30 years since market reforms began, the Chinese economy has
capitalised on its triple advantages of low capital costs, low energy prices
and cheap labour, growing - through exports and investments - to become
the world's second-largest economy last year. But this development
model is flawed and cannot be sustained. To ensure steady future growth,
China must propel its economy onto another level. It must revamp its
economic structure.
It's easier said than done. The central government has promoted
economic restructuring since 1996, at the start of its ninth five-year plan.
Yet, it has little to show for its efforts. In its 12th five-year plan, unveiled
this year, it again stressed the need to transform our model of economic
development. But not all analysts are optimistic about its implementation.
China's current development model is the main reason progress on
restructuring is slow. With its control over a substantial amount of
resources, the Chinese government can react more quickly to a crisis
than other similarly large economies. However, the model impedes efforts
to restructure it.
In the wake of the global financial crisis, local governments have made
use of Beijing's 4 trillion yuan (HK$4.5 trillion at exchange rates then)
stimulus package to extend loans and provide land to boost state-owned
enterprises and build infrastructure. Private-sector industries could not
compete in the face of such resource distortion and monopolistic
practices. The "de-industrialisation" of capital is becoming a serious risk.
The government-led allocation of resources has other unintended
consequences. By following the central authorities' directive to develop the
economy in prescribed ways, local governments are in fact homogenising
their economies. Not only will they have lost their own comparative
advantages, they will also find themselves fighting one another for a
shrinking market share. And, while China's real economy is in decline, the
country's demographic dividend is also coming to an end. So, a major test
for China's restructuring is how to improve factory productivity and build
comparative advantages.
First, the government should be clear about its function. It should ease
itself out of its role as resource allocator, and instead focus on creating a
fair environment for business. It should provide equal opportunities for
education, employment, entrepreneurship and innovation, and build a
social safety net commensurate with the country's development.
In his speech in Dalian, the premier spoke of the need to "uphold and
improve the basic economic system, speed up fiscal, taxation and
financial reform, reform of the prices of factors of production, reform of
monopoly sectors and other important fields". These are precisely the
areas where reform has stalled.
The example of rationalising resource prices is typical. China's export oriented
economic model has meant that a substantial share of its price
subsidies in fact flows out of the country. This not only means a net loss
of national welfare; it also places a heavy burden on our resources and
environment. Hence, factor price reform and a plan to introduce
environmental charges have been high on China's to-do list for a long
time, but they have been pushed back repeatedly because of worries over
inflation and the moribund global economy.
The State Council's guidelines on private sector investments - released
last year as a follow-up to its policy set in 2005 - made clear the principles
of equal access and fair treatment. But, in practice, such guidelines are
easily "neutralised" by department documents, and state-owned
enterprises continue to monopolise their sector and influence decision making.
Private enterprises are effectively shut out.
For economic restructuring to succeed, China must be clear about its
own strengths and weaknesses, and not let talk of the "Chinese model" go
to its head. Its structural problems aren't new, and there's even agreement
on some of the solutions. What's worrying is that the over emphasis on
"maintaining stability" is putting a veneer of untouchability on the status quo. In the end, it's political will that will determine whether reforms are used, as the premier has pledged, to solve China's development problems.

This article is provided by Caixin Media, and the Chinese version of
it was first published in Century Weekly magazine. www.caing.com

Item 2.5 Hu Shuli, the author of the piece above is the most courageous and influential economics journalist in China.  You can learn more about her from this fascinating article in the New Yorker two years ago. After the New Yorker article was published the fat cats in Beijing who controlled the publishing company for which Hu Shuli worked decided that it was too risky to provide her a pulpit.  She and her team of investigative journalists didn't miss a beat. They relocated to a base in Guangdong province just north of Hong Kong.  You can read her work in English here--http://english.caixin.cn/.