Point of View: Japan Must Help PRC Reshape Its Economy

Op-Ed / Opinion | 18 May 2010

The economy of the People's Republic of China (PRC) continued to grow rapidly even during the global economic crisis, but it has now hit a turning point. The Chinese government is very serious about reshaping the domestic economy, with the key goal of transforming it into a service-driven, green economy. This will have an impact on the Japanese economy, so Japan should proactively support this transformation.

The Asian Development Bank (ADB) and the Government of PRC organized a workshop in Beijing in January to discuss national development and reform in support of the government's work on the next five-year plan, covering 2011 to 2015. Many of the Chinese participants pointed out that in the past several years, income disparities between the regions have widened, and that rapid economic growth in heavy industry in PRC has caused major pollution problems. Participants recognized these were the undesirable side-effects of strong economic growth that would have to be dealt with in PRC going forward.

Over the past three decades, PRC's development policies have been successful in lifting more than 400 million people above the poverty line. PRC has maintained a high economic growth pace even through the global economic crisis thanks to high levels of public investment, abundant credit made available by the government, and well-coordinated fiscal and monetary stimuli. However, the kind of economic growth that PRC has enjoyed carries with it some undesirable side-effects and there is a limit to the amount of public investment and monetary expansion that is possible.

Sustaining economic growth in the medium- to long-term requires rebalancing the economy, with a stronger emphasis on boosting private domestic demand. It is necessary to transform from a highly manufacturing-oriented economy to one where services play a bigger role. A more consumer and service-oriented economy with a financial sector that allocates capital more efficiently will generate more jobs and lift living standards.

Generally speaking, as economies become more capital intensive, there is a decline in the number of jobs needed for each unit of manufacturing output. The service sector can create more jobs even in a capital-intensive economy. This would also help distribute the benefit of the growth more equally. Within developing Asia, some examples of this include medical services in Malaysia, business process outsourcing in India and the Philippines, and tourism-related services in Thailand.

For PRC to create a green economy, it must develop more technologies and services that will more efficiently use resources and reduce pollution. An expansion of the green economy and its related industries, such as renewable energy, organic food and agriculture, and forestry protection and conservation, will create many new business opportunities and provide new sources of growth.

According to China Business News, energy conservation and environmental protection industries in PRC contributed 4.9 percent of gross domestic product in 2008. It is estimated that this figure may increase to 10 percent by 2015.

Up to 40 percent of PRC's 4 trillion yuan ($586 billion, or 55.262 trillion yen) stimulus package to address the economic crisis was targeted at green projects. PRC has introduced renewable energy, particularly wind and solar power. It is also working hard to close down old, inefficient power plants and build more energy-efficient ones.

The Chinese authorities have gradually made their currency more flexible in the past, and this trend should continue. Exchange rate flexibility helps rebalance sources of PRC's growth by shifting resources more toward domestic production and strengthening private consumption.

It thus helps make the Chinese economy more resilient to external shocks. A rebalancing in PRC's economy will reduce its current account surpluses, contributing to a reduction in global current account imbalances. However, when and how the exchange rate should be adjusted is a decision for the Chinese authorities to make.

PRC is a big country and change is, therefore, difficult to achieve. The process of rebalancing the economy will require time, resources and cooperation with other countries such as Japan. PRC's efforts to become greener will benefit Japan directly and indirectly. As a leader in environmental technology, Japan should support Chinese efforts through investment and technical assistance.

Some Japanese companies may be worried about the protection of intellectual property rights and their investment. While PRC has already made great strides on intellectual property rights, enforcement remains a challenge. It is crucial for PRC to show that can protect intellectual property if it is to attract innovative technologies.

The best course for Japan and other countries is to use international institutions such as the Asia Pacific Economic Cooperation to encourage PRC to keep moving forward on the protection of intellectual property.

Another way for Japan to help PRC develop a green economy is by working through the ADB, which is an apolitical and neutral multilateral institution. Presumably, it is easier for a country like PRC to discuss sensitive issues such as climate change with the ADB, of which they are an important member, than in bilateral dialogues.

The ADB is extending a long-term loan of up to $24 million to a joint venture between PRC and Japan to build a wind farm in the Inner Mongolia Autonomous Region. Because of our relationship with the Government of PRC, it is less likely that PRC will make regulatory changes that would hurt that particular company. In this case, then, one could say that the ADB is providing a kind of "insurance" on the project.

The ADB has conceived the idea of a clearing house for environmental or clean energy technology that will bring together potential buyers and sellers of such technology. Japanese companies could access this platform as a way of accessing the large Chinese market, finding a Chinese partner and doing business in a cost-competitive way.

Japanese companies should work very hard, wherever they go, to understand who they are working with. I'm not that pessimistic that history in East Asia will hold back improved relations.

Look at the Mekong region of Cambodia, Laos, Vietnam and Thailand. It is in the process of economic integration despite the fact there were hostilities between the countries only 20 years ago.

It may well be true that doing business may not always be easy in PRC. However, PRC has been changing rapidly and it is important for Japan to continue supporting that change, even if it takes time.

Ten or 15 years from now, PRC will be ranked as an upper-middle-income country if its economy continues to grow at the current pace. Sustaining that growth--and improvements in the quality of that growth--is essential for the prosperity of both PRC and Japan.