Urgent Adjustment

Since China's economic growth abated as a result of the global financial crisis, the adjustment of the country's economic structure was given more attention than ever before. Besides various internal measures, the country's painful economic adjustment could certainly be made more successful by looking at the world economy from a different perspective. Ma Xiaohe, Vice President of the Academy of Macroeconomic Research under the National Development and Reform Commission, offered his view on Caijing.com.

The edited excerpts follow:

Since China's economy has been integrated into the world economy, depending solely on domestic striving as a way to govern economic structure may not be a reliable means for the country to hit its desired target. It is fair to say that adjustment of the economic structure cannot be achieved without considering both domestic and international factors.

We are reminded repeatedly that China's integration into the global economy has made its economic issues more complicated than ever before. Even more serious, any external factor may produce some sort of influence on the Chinese economy.

Take China's industrial structure as an example. A major part of its production capacity was set to meet foreign demand prior to the financial crisis. In 2008, China produced 580 million tons of iron and steel, 1.4 billion tons of cement, 20.6 billion garments, 6 billion pairs of shoes and 137 million computers. What should not be neglected is that these products were largely made for foreign companies. For example, China made 560 million cell phones in 2008, most of which were labeled with international brands, including Siemens, Motorola, Apple and NEC. Obviously, China's massive production capacity belongs to the whole world since an overwhelming number of made-in-China products are made for foreign brands and distributed globally. As a matter of fact, the whole process of production in China, including research and development, design, parts imports, manufacturing and sales, is closely linked to the outside world.

Owing to its low labor costs, China has been mainly engaged in the labor-intensive sectors of the global industrial chain. As Shi Zhenrong, President of Taiwan-based Acer Group, said, industrial division is just like a U-shaped smile in the two upper ends, namely research and development, design and product standards on one end and branding, sales and other services on the other end, make much more profit than the lower part, which stands for processing and production. It has been widely acknowledged that technology is the core indicator of modern enterprise competitiveness and comprehensive national power. Possession of technology always comes hand in hand with high profits in the global industrial chain.

Unfortunately, major developing countries, including China and India, fall into the lower part of labor intensiveness and less profitability, whereas advanced countries occupy the two upper ends of high profits and technology intensiveness. For example, a Logitech wireless mouse sells for $40 in the United States, while China only earns $3 by manufacturing it. Likewise, Barbie dolls sell for $9.9 each in the United States, but China earns $0.99 per doll.

In this sense, adjustment of the economic structure in the global context means an upward movement toward a more profitable sector in the global labor division, which will be difficult to achieve in a short term.

The global financial crisis has only made China's situation worse. Prior to the crisis, developed countries, such as the United States and the EU countries, used to produce and export hi-tech products with high added value and import labor-intensive products, and China used to produce and export labor-intensive products. The crisis changed the old framework of supply and demand. People in Western countries began to alter their high-debt consumption mode toward less spending and more savings, which caused a decrease in imports of labor-intensive products from developing countries.

What's more, in an effort to balance their mammoth trade deficit, advanced countries spared no efforts to increase their exports of high technology products. On one hand, China has formed too large an export-oriented capacity for labor-intensive products, as its exports seem doomed to decrease as a result of sluggish demand from advanced countries. On the other hand, with hopes of increasing its international competitiveness, China has also built up its hi-tech and high value-added industries, which have also been brought under fierce international competition as a result of mounting export efforts from advanced countries. Meanwhile, emerging economies like India, Viet Nam, Indonesia and Honduras have begun exporting labor-intensive products to developed countries with even lower costs than China. In this sense, the outbreak of the global financial crisis made China's overcapacity even more serious than before.

The Chinese economy has been largely propelled by investment in capital, labor force, land and resources rather than being based on technological innovation, which causes problems such as high energy consumption and serious pollution. Our current problems are lack of technological advancements, inadequate investment in research and development and an imperfect system environment.

The devastating world financial crisis destroyed the old balance of demand and supply. In the long run, advanced countries will decrease their consumption and increase their savings, and some other developing countries will take the place of China in the global trade framework. If it comes to fruition someday, China will face more and more serious domestic overcapacity problems.