美中全球议题对话项目

The latest contributor to Chinese overcapacity can be dated back to 2009, when the government, in face of the global economy crisis, stimulated investments in real estate, infrastructure construction, and social welfare, to the tune of 4 trillion yuan (about $588 billion dollars)[1]. This rescued the economy from a hard landing but also caused overcapacity in the heavy industries, and this overcapacity is intertwined with the debt problem of the SOEs. According to National Bureau of Statistics of China, unprofitable manufacturing SOEs increased from 4,288 in 2012 to 5,016 in 2014, among which unprofitable SOEs in coal and ferrous metal mining and washing industries almost increased by half in three years.

Although many SOEs in the heavy industry turned unprofitable, banks were still willing to lend to them, as SOEs seemed sure to be bailed out by the government in the end. The IMF estimates that SOEs account for about 55 percent of China’s corporate debt, which is 145 percent of Chinese GDP, but that they only account for one-fifth of industrial output.

To deal with overcapacity and heavy corporate debt, China needs structural reform, which requires shutting down the factories and opening up more sectors of the markets to outside competition. The inefficient allocation of capital has been dragging down economic growth, and it also has led to the recent price disputes on steel trade between China, the United States, and the European Union. Meanwhile, reform will be painful. Not only will domestic workers and companies suffer, but also world exporters to China will see prices plunge as well. During the IMF Sub-Saharan Africa Economic Outlook Conference in Peking University in June, Wenjie Chen, the economist from IMF Africa Bureau, said that according to the regression result, China’s rebalancing is the largest contributor to the plunging commodity price in Sub-Saharan Africa[2].

A comprehensive reform agenda and a thorough dialogue between China and the United States may help to reduce the volatility in global markets and benefit not just the two countries, but also the international community. Multilateral and bilateral dialogues can be a useful way for cooperation, which may help address the two countries’ major concerns, share experiences, and integrate global perspectives into the structural reform.

In bilateral dialogues, major concerns and disputes may be directly and thoroughly discussed by the two sides. As many Chinese corporations with overcapacity are state owned, dialogues are necessary between the United States and the Chinese government, which has the direct influence on the SOEs. Plans for cutting capacity in which sectors in which way may be discussed in detail. Meanwhile, both sides need stick to the principle of transparency and trust during the dialogues. In the latest round of U.S.-China Strategic and Economic Dialogues, overcapacity in Chinese steel industry was specifically addressed, and the United States agreed to China’s plan of reducing 1,000 to 1,500 million tons’ steel production capacity in the next five years.

Many questions still remained, but continued dialogues may improve the situation step by step, and they can get both sides updated with each others’ policies and plans, thus reducing the unnecessary sacrifice of the business sectors in the disputes. As for assessing the impact and reducing the turmoil during the transition, sharing experience should be a major part of the dialogues, which should be held among cities and local companies. China can learn a lot from the history of the United States, which also was once the “World's Factory.” Many years ago, the United States went through some of the challenges that China has to go through right now, and the United States because of it has become a mature economy, said U.S. Treasury Secretary Lew at the G-20 finance leaders meeting in Chengdu. According to the U.S. Census Bureau, from 2000 to 2010 the number of people employed in the manufacturing industry decreased from 19,644,000 to 14,081,000, but in the same period, productivity in this industry increased about 37 percent. How to improve efficiency and upgrade the industry and how to reemploy the laid-off workers and build up a more sustainable welfare system may be the central topic of bilateral discussion. Seminars and co-conducted researches may be held, and universities may also take part in the research.

Apart from bilateral dialogues, China and the United States may also cooperate during the multilateral talks with other countries, and international organizations that may provide insights and expertise from global perspectives. During the G-20 finance leaders meeting, Chinese Premier Li Keqiang held the ‘1+6’ Round Table meeting with leaders of six international organizations, such as the International Monetary Fund (IMF), Organization for Economic Co-operation and Development (OECD), and the World Bank. In the joint press release, the OECD and the IMF said they supported structural reform as a main agenda for G20 meeting, and with other international organizations, they agreed to “tap into their expertise to provide valuable policy analysis and recommendations for G20 structural reforms”.

At a time when structural reform is urgent and while populism rises with protectionism, China and the United States, the two largest economies in the world, need to stand strong in the spirit of globalization and strengthen their cooperation in economic policymaking. Among the many ways of cooperation, I believe dialogues would be especially useful for policymaking in Chinese structural reform. Hopefully, these dialogues will enhance world economic development and generate new growth for the global economy.

[1] Song Min, "Night ChatII: Finance Night of Jing’an District——New Opportunities for Financial Capital in the Era of Mass Entrepreneurship and Innovation," 2016 Lujiazui Forum, Shanghai, June 2016.

[2] Wenjie Chen, "The 4th NSE International Development Forum in Peking University: Sub-Sahara Economic Outlook –Policy Reset and Sino-African Cooperation," June 2016.

Zhihang Du is a senior of international journalism major at Beijing Foreign Studies University.

COMMENT FROM CALEB HUFFMAN (November 21, 2016):

Zhihang, I greatly enjoyed reading your article. You propose bold economic reform in China, guided by tough discussions around globalization and trade. I do have a question. Besides reducing debt carried by state-owned enterprises (SOEs), what benefits can China reap from the proposed economic reforms? China has already undergone large, and by many reports, successful economic reform. SOEs may provide other benefits that outweigh the cost of inefficiency, such as a stronger Beijing influence over the economy.