China Herald: Reform is more needed than a financial stimulus

The People´s Bank of China, the central bank, recently pushed 100 billion Renminbi to its five largest banks to stimulate the economy. But China´s economy rather needs reforms than more capital, argues financial analyst Sara Hsu in the Diplomat.

Sara Hsu:

If China’s economy is to be restarted, it will need more substantive reforms. Labor-intensive manufacturing companies are facing rising costs, including increasing wages, and are moving abroad or diversifying to Malaysia and Vietnam. Chinese workers are becoming more sophisticated and consumption-oriented, seeking higher wages and better opportunities. The leadership is in favor of improving the services and high-tech manufacturing sectors, but appears to be stalled in lifting constraints to growth in these areas.

These constraints abound. In the logistics sector, state-owned enterprises dominate port, rail and air delivery services. The state-owned logistics sectors spans the nation and enjoys an advantage in more regulated logistics areas, such as rail cargo transportation. Similarly, China’s telecommunications industry is dominated by three state-owned enterprises.

Although these state-owned enterprises have recently allowed private enterprises to lease networks, cooperation with private businesses fails to break up the monopoly enjoyed by these large state telecommunications companies. Finally, barriers to growth in creation and manufacturing of innovative high-tech products include a lack of protection for intellectual property rights. Lack of enforcement of intellectual property rights ensures that innovation by private firms may be easily usurped by imitators who produce the same products.

To combat its own malaise, China needs real reforms in targeted industries. In general, the state sector remains too pervasive, and challenges to the growth of private sector enterprises are difficult to surmount. In contrast to what other analysts have asserted, the reform process does not have to be stalled in order to combat slowing growth. Slowing growth can only be addressed in a meaningful way by changing policies to promote employment and the expansion of particular sectors. Economic resuscitation and long-term growth need not, and should not, be mutually exclusive.

More in the Diplomat.

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