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Restructuring a must to national economy

By Zhang Liwei (China Daily)
Updated: 2009-02-09 08:00

The global economic recession may be a disaster for export-oriented small and medium-sized enterprises (SMEs) in China. The outlook is particularly grim in the Pearl River Delta and eastern China's coastal areas, where many labor-intensive manufacturers have gone bust and many unemployed migrant workers have been forced to return to their rural homes.

Mounting unemployment looms and some academics say China should not continue its economic restructuring at the expense of labor-intensive manufacturers, including the low-end clothing and toy sectors, as the global financial crisis hits.

Such views are politically correct in the current economic circumstances. Massive unemployment, if it occurred, would threaten social stability and exacerbate the country's economic slow-down. But it is not right to accuse China of voluntarily giving up on its labor-intensive sectors. Discussion on the country's economic restructuring and its labor-concentrated industry's future needs to be rational.

China's economic reshuffling, which aims to improve efficiency and reduce consumption of energy and resources, is not inducing massive bankruptcy of labor-intensive and export-oriented enterprises.

The plight these businesses are facing is mainly caused by the slump in overseas demand. Orders from Western countries are shrinking significantly as the global economy slips into a recession cycle.

Energy and resource prices in China went up substantially the past few years, which, in addition to the yuan's continuous appreciation and a new law giving greater protection to labor interests, has increased production costs for Chinese businesses, diminishing their comparative price advantage in the international market.

It is illogical to equate bankruptcy of labor-intensive industries to China's ongoing economic reshuffling and conclude that China should continue to expand its labor-concentrated manufacturing to stabilize employment in the coming decades.

China's economic overhaul is irreversible but that does not necessarily mean abandoning low-end manufacturing or labor-intensive industries. The main reason for economic reshuffling is that China must reform pricing of production factors, such as land and labor, making such prices more market-based. Letting the market determine resource prices, for example, will help enhance energy efficiency and promote sustainable development, while labor price hikes will improve income distribution, which will in turn expand consumption and jack up domestic demand. If China does not reform production factors pricing and improve people's income and well being, its economy may risk losing momentum in the long run.

Business bankruptcies in the Pearl River Delta and the Yangtze River Delta should be viewed in a rational way. China is a large economy with imbalanced development among different regions. If the Pearl River Delta and the Yangtze River Delta are deemed the developed regions in China, middle and western regions should be considered developing economies. It is similar to the scenario in ASEAN, which has both highly advanced economies such as Singapore and relatively underdeveloped countries such as Vietnam.

The Pearl River Delta is one of the most advanced regions in China and its per capita GDP and income are among the highest in the world. Its comparative advantage in manufacturing has been considerably reduced. It is inappropriate for the Pearl River Delta to continue to churn out clothing, which would be like Singapore still making electronic products as it did decades ago.

Not expanding export-oriented manufacturing in the Pearl River Delta does not mean China should give up these industries completely. They can be transferred to other regions with lower production costs. Although prices of production factors, such as energy, resources and capital, will likely level off across the nation, the gap among different regions in other factors, such as labor, land and tax policies, will remain for quite a long time. So labor-intensive enterprises should shift inland.

The main challenge the Chinese economy faces is industrial upgrading and economic restructuring. Unfortunately the Pearl River Delta is at the forefront of China's economy and will go through the restructuring growing pains first.

The ongoing global financial crisis could have a greater-than-expected toll on China's real economy because its low-efficiency development model, which relies heavily on energy and resources, has come to an end and China has failed to implement timely economic structural reform.

If businesses in the Pearl River Delta fail to evolve further up the value chain and labor-intensive manufacturing cannot be transferred to relatively underdeveloped regions, the twin blows of excessively high production costs and shrinking overseas demand will heighten the current economic slow-down. China may slow down its pace of reform to temporarily stabilize employment, but it must persist in carrying out necessary economic restructuring. Otherwise it will struggle to maintain its vibrant economic growth in the long term.

The article is reprinted from 21st Century Business Herald. The author is a commentator with the paper