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Build New Open Economic System to Promote Domestic Reform -- An interview with deputy director of Development Research Centre of the State Council, Long Guoqiang

Submit Time:10-12-2015 | Zoom In | Zoom Out

Author: | Source:Economic Information Daily

Abstract:

● A huge market growing rapidly in Chinese mainland has formed a new competitive advantage. Together with a growth rate of 7%, especially new opportunities created by newly added demands, it will speed global capital investment into China.

● Better infrastructure is accordingly required for a growing market without exception, whether it is the "re-industrialization" strategy proposed by Obama administration or the "Industry 4.0" launched by Germany. For developing countries, especially emerging economies, more efforts will be required in building and improving infrastructure in order to accelerate their industrialization and urbanization. Chinese enterprises have strong competitive advantages in the field of infrastructure construction.

● New opportunities created by China's opening to the outside world are not merely the opportunities for expansion of the scale but ones for the acceleration of structural upgrading. To formulate new strategies for opening, we need to consider opportunities brought about by changes in the external environment.

China's opening up is faced with "triple transition" as well

Long Guoqiang says that over the past thirty years, China has pioneered a successful road to industrialization by continuously promoting and deepening opening up against a backdrop of globalization. When Chinese economy has come to a new normal, however, it does not mean that we can pursue the original strategies along the old road that we have taken over the past. China's opening up is faced with "triple transition".

First, the period for recovery and adjustment of global economy after the financial crisis. This period does not come to a close and will continue for some time. Compared with the prosperous period before 2007, it is characterized by slowdown of external demands, exacerbation of global over capacity, intensification of competition, local trade protectionism and increase of trade friction.

Second, the construction period of a new round of international trade rules. Global economic and trade rules have been evolving and currently entered on a new round of construction. On the one hand, WTO as a multilateral system is still playing its due role; on the other hand, regional trade platforms could come ahead of multilateral trade ones and thus bring some new trade rules into being through negotiations. TPP, for example, does not only form new regional trade arrangements but also facilitate the formation of a batch of new international trade rules. Once such rules come into being, they will pose opportunities and challenges to all countries concerned. The same is true for China.

Third, the shifting period of comparative advantages. Over the past thirty years, China participated in global competition with low cost as its main advantage, especially low labor cost. After three decades of development, huge changes have occurred in China's population structure and the supply and demand structure of labor market. According to statistics, China's labor force came to its peak in 2012. After that labor force would not grow further, but was closely followed by the ageing pressure. More dramatic changes were observed in the supply and demand structure of labor market. Every year 15 million people will come into workforce. In 2000, admissions into colleges and universities amounted to 1.08 million and more than 14 million were left into workforce as blue-collar workers. But now a year's enrollment adds up to 7 million and only a half are left into workforce as compared to the number more than 10 years ago. A phenomenon accordingly occurs in the labor market: It is hard for college graduates to find jobs on the one hand and for the factories to employ industrial workers on the other hand. As a result, wages grow fast at a rate of double digit for successive years. The tension between supply and demand has caused a series of profound changes consequently, stimulating enterprises to substitute machines for workers and bringing about a high job-hopping rate.

A cooperative investigation conducted by the Development Research Centre of the State Council and relevant department under the Ministry of Commerce shows that there was an extremely high turnover rate in enterprises engaged in processing trade. There was a very high proportion of enterprises with their turnover rates exceeding 100%, that means all workers would be replaced on average over a year. Enterprises were reluctant to train their workers, for a great number of workers would leave them after training. It was precisely in that period, however, that enterprises had to rely on high quality workers, but the change in work force quality did not effectively support the enhancement of enterprise competitiveness.

New changes bring about new influence on transformation and upgrading

Long Guoqiang holds that the triple transition of opening up means both challenges and opportunities to the transformation and upgrading of Chinese economy. Challenges come from the insufficiency of external demands, deterioration of trade friction, and mismatch of work force quality with the demand. Opportunities result internally from the changes in the structure of work force. Blue-collar workers pose huge challenges because of labor cost and work force quality, for example. But college graduates, on the other hand, mean a lot of opportunities. More highly educated workers are able to engage in high-end industrial activities, including service sector and R&D.

A huge market growing rapidly in Chinese mainland has formed a new competitive advantage. China has turned into a real huge market from a so-called potential one. What's more, it is still growing at a rate of 7%, marveled at by the whole world. Although its economic growth rate drops to 7% from 10%, the growth by 7% means an increase of more than 700 billion USD, almost equivalent to the annual GDP (800 billion USD) of Turkey (NO. 16th biggest economy in the world). So huge a market, especially the newly added demands, will bring a lot of opportunities and speed global capital investment into China. For those foreign investors intended to make inroad into Chinese market, they need to carry out R&D in China. Observations over past few years show that a large number of transnational corporations have transferred their regional headquarters and R&D centers to China.

As far as "bringing in" is concerned, the change in comparative advantages attracts high-end industrial activities and speeds talents into China. As for "going global", the external market is also blessed with major favorable opportunities. First, a global wave of infrastructure construction. Developed economies is faced with infrastructure updating while emerging economies with the construction of infrastructure works. Better infrastructure is accordingly required for their industrial upgrading, without exception whether it is the "re-industrialization" strategy proposed by Obama administration or the "Industry 4.0" launched by Germany. High-speed railway, information technology infrastructure, such as 4G, are all hot areas of infrastructure construction. For developing countries, especially emerging economies, more efforts will be required in building and improving infrastructure in order to accelerate their industrialization and urbanization. Chinese enterprises have strong competitive advantages in the field of infrastructure construction. When they are awarded contracts of infrastructure construction in a large number, they will boost exports of Chinese equipment. Chinese power generating equipment, transportation equipment and mobile communication apparatus, compared to those previously exported, are more technology-intensive, capital-intensive or with higher added value. Such a global wave of infrastructure construction, therefore, is favorable to the upgrading of Chinese export composition.

Second, the opportunities in foreign investment. Although it is a big foreign capital user as ever, China has grown into a major overseas investor from a small one now. China's outbound investment amounted to only 2.85 billion USD in 2003 while that exceeded 100 billion USD last year. What areas can outbound investment go? Enterprises are diversely motivated to increase market shares or invest in mines or oil fields. The most important, however, is to acquire technologies, R&D capabilities, brands and international channels through overseas merger and acquisition, which are conducive to integration of international technologies, brands and distribution channels with domestic manufacturing capacities and lower comprehensive costs and accordingly promote the competitiveness of the whole industrial chain. In short, new opportunities created by China's opening to the outside world are not merely the opportunities for expansion of the scale but ones for the acceleration of structural upgrading. To formulate new strategies for opening, we need to consider opportunities brought about by changes in the external environment.

The new normal imposes new requirements on China's opening strategy.

Long Guoqiang says that to understand the opening strategy in the new period, we need to understand the new requirements that the new normal of economy imposes on the opening strategy. At APEC concluded last year, President Xi talked about the new normal of Chinese economy from three aspects. The first is Chinese economy to grow at a medium-to-high rate rather than at a super-high rate as before. Such a shift of the growth rate is simply interpreted by many people as a slowdown. The shifted growth rate, as a matter of fact, is still rather high as against the global economy. The second is transformation and upgrading of economic structure. In terms of demand, supply and industrial structures, Chinese economy in the new normal is in an acceleration period of structural adjustment. The third is the shift of the impetus for China's economic growth. The long-term reliance on large-scale increase of investment, production factors and mass input to stimulate economic growth over the past decades will give way to innovation, quality and brand-oriented development.

Long Guoqiang holds that it covers two aspects. For the first aspect, it means structural transformation. Structural transformation and shift of the impetus for economic growth put a question to us, that is, how to make strategic adjustment and utilize the international market and resources in the next stage of opening to serve structural upgrading and shift of the impetus for growth. For the second aspect, it means the new requirements for the rise of China as an emerging power. A slowdown of economy in the new normal is nothing but what the economic law governs, and it has been experienced by many catch-up economies. Behind it, for China, is a rapid expansion of its economic scale. The rise of China as the second largest economy and an emerging power is bound to have a great impact on international politics, the global governance and the international economic and trade system. If the relation between China and the international community is not well handled, it would be relatively hard to make better use of external markets and resources in support of China's economic development. The new opening strategy is designed to address this issue. When Chinese economy sees a rapid expansion of its scale and faces structural transformation and upgrading, in addition to better use of external markets and resources, one more mission we have to undertake is to create a win-win external environment for China's development by means of strategic adjustment and handle well the relation of China to the outside world, which may be what we have to address in the next stage of the opening strategy. As a new target of the opening strategy, this is quite different from the main objective set for the opening strategy thirty years ago, that is, accelerating China's industrialization by earning foreign exchange through exports.

Focus on Lifting China's Position in the Global Value Chain in Future

When it comes to the new target and strategic focus of China's opening strategy for the period of the 13th Five-Year Plan and beyond, Long Guoqiang points out that the core goal of China's opening strategy for the first thirty years was to earn foreign exchange through exports. Currently, China's opening strategy is aimed to serve two purposes: one is to create a good external environment for the rise of China and ensure its peaceful development, and the other is to make good use of external markets and resources to speed up the structural upgrading of China. Against the backdrop of a deepening global production value chain, focus will be placed on lifting China's position in the global value chain.

Long Guoqiang stresses that to achieve the new strategic goal, we need to determine first of all what the strategic focus is.

First, we will strive to create a favorable international economic environment. For a large economy like China, we need to consider, first of all, how to participate in global economic governance and a new round of rules formulation, and how to balance the interest demand of China and that of other countries. In the past, we used, more than often, to accept existing rules, but in the future we will lead the rule governance by giving full consideration to changes in global governance in the new age. That requires us to increase our capacities in this regard, boost the soft national strength and convert our hard strength into contributions to international governance.

Secondly, focus will be put on the opening of service sector with growing efforts to improve the investment environment. The significant difference between this new round of utilization of foreign capitals and the previous round lies in two aspects: one is the transfer of focus from the manufacturing industry to the service sector and the other is a change in the foreign investment management system. For China-USA BIT negotiations under way, China will apply a management model of pre-establishment national treatment plus a negative list. That means great changes in government acts and management models to us. Behind such changes, as a matter of fact, are significant transformation of governmental management philosophy.

Third, efforts will be increased to promote outbound investment. Outbound investment will increase cooperation between China and host countries, sharpen Chinese enterprises' edge in integration of global resources, and forge competitive transnational corporations of China. A set of systems at home, including the management system and philosophy with respect to outbound investment, how to shift from approval and management to service and regulation in and after execution, will be challenged to a great extent. As far as enterprises are concerned, many new requirements are imposed on how to strengthen their global operation capacities, including global strategy formulation, talent recruitment, internal management, and compliance with social responsibility and culture in the international community.

Long Guoqiang holds that the key to well implement the new opening strategy is to make appropriate institutional arrangements, which are called "building a new open economic system". It is not a reform for the sake of institutional reform but an institutional reform for the purpose of the new strategy. Institutional innovation is the means and where efforts should be made. To build a new open economic system, therefore, we must focus on the new goals and priorities of the opening strategy.

Long Guoqiang finally adds that opening means one more function to China. Summarizing experience over past 30 years of opening, we may see that opening can facilitate domestic reform in addition to promoting the use of two markets and resources for accelerated development. The resolution by the Third Plenary Session, therefore, pointed out that we need to promote reform by opening wider to the outside world. For this reason, accelerating reform on foreign-related economic systems plays an important driving role in overall economic reform of China. (Jin Hui)


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