The Strategic Direction for the Restructuring of Industry in China

From: English Edition of Qiushi Journal Updated: 2013-08-20 15:20
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The impact of the international financial crisis has fully exposed the unbalanced, uncoordinated, and unsustainable state of China’s industrial sector as one of the most outstanding problems facing the country’s economic development at present. Therefore, it is imperative that we speed up the strategic adjustment of China’s industrial structure.   

I. The historical reasons behind the emergence of structural problems in China’s industry

China’s current industrial structure emerged during the country’s transition from a planned economy to a market economy and at a time of accelerated industrialization. During this process, China opted for a gradual approach to reform and a differential approach to development, the primary goal being to lift the country out of poverty and underdevelopment in the shortest time possible. Under this approach, economic reforms were carried out throughout various sectors, with some taking place sooner, faster, and on a deeper level than others. Moreover, these reforms were almost always accompanied by special policies and various forms of preferential treatment. As a result, though the market economy was able to grow, there was no guarantee of equal opportunities to compete in the market. Accordingly, levels of development in different sectors of the economy varied significantly, with certain areas of the country racing ahead and becoming wealthy while others were left lagging behind. In structural terms, this has been manifested as a major imbalance in the profitability of different industries, and significant disparities in the policy conditions that underpin the development of industry in different areas of the country.  

Work in progress on an Airbus A320 assembly line in Tianjin (Photo taken on September 25, 2012). Having been earmarked as one of Tianjin’s eight major competitive industries for the period of the Twelfth Five-Year Plan, Tianjin’s aerospace industry has witnessed rapid development in recent years, becoming a key focus for local industrial restructuring and economic development. / Photo by Xinhua reporter Zhang Chaoqun

This approach to reform and development dictates that the government is able to exert a major influence on competition between different parts of the economy (industries and areas). With regard to the development of industries and regions, this influence is seen as a race between local governments to provide preferential policies or special treatment, and in the guiding effect that differential industrial policies, in particular investment approvals, exert on economic activities. Regions that enjoyed preferential policies took the lead, and industries that received policy support witnessed rapid development. Thus, economic resources flowed towards high-earning industries, fueling the rapid expansion of these sectors. During this process, the selective policies implemented by the government were in nature a means of boosting regulation by market forces. This imbalanced approach to development was responsible for creating the miracle of China’s economic growth. However, despite being successful in boosting the momentum behind economic development, it has inevitably been the cause of even greater structural imbalance.   

Under this system, China’s industrialization over the course of more than 30 years has clearly demonstrated the characteristics of “flat expansion.” In other words, in government supported sectors that boast comparative resource advantages, China has developed huge productive forces without the need for technological advances by engaging in large-scale investment and introducing large amounts of foreign capital. In doing so, it has been able to rapidly occupy both foreign and domestic markets. However, despite the fact that this mode of expansion has fueled China’s growth into the world’s second largest economy over the space of just a few decades, it also demonstrates several major limitations, such as the low application of technology, very little product diversity, and a weak capacity for innovation. Under this model of growth, companies tend to be more concerned with securing preferential policies and gaining the resource edge than devoting themselves to innovation.

The formation and evolution of an industrial structure is an organic process. While the efforts of the government to inject impetus into the market have been met with sound economic results, the tendency to do “too much of a good thing” has encouraged and even subsidized production capacity that the market has no way of absorbing. When industrial imbalance becomes an outstanding problem, the government then turns to direct regulation in order to address these imbalances, and may even resort to the mandatory elimination of outdated production capacity by administrative means. In cases where the affliction is extremely severe, drastic treatment does indeed need to be adopted. However, it must be noted that administering medicine is not the key to staying healthy.     

II. The strategic direction for the restructuring of industry in China at the present stage

From what we have discussed above, it is evident that there are deep-rooted causes behind the state of China’s industrial structure as at present. The optimization of the industrial structure is by no means a simple case of adjusting the proportions that the various sectors of the economy account for. On the contrary, optimization is similar to the processes of dynamic change and succession in an ecosphere. Dynamic optimization is only possible when there is a diverse, changeable, and highly adaptable industrial structure.  

Fundamentally speaking, the industrial structure will only be able to truly embark on the path of balanced and coordinated development once China’s gradual approach to reform accomplishes its historical mission, once differential development is replaced by a balanced approach to development, and once the role of the government shifts towards creating an environment for fair competition and equal opportunities instead of implementing differential policies. Objectively speaking, China still has a long way to go before it can reach this stage of development, and the existence of relatively large imbalances in the industrial structure is likely to continue for a period of time to come. However, this does not mean that there is nothing we can do at present to resolve or mitigate imbalances in the industrial structure. On the contrary, provided that we are able to gain a deeper understanding of the objective laws that govern changes in the industrial structure and adopt more scientific and effective means of regulation, there is every chance that positive results can be yielded.   

1. We must be aware that only by making the transition from “flat” industrialization to “three-dimensional” industrialization can our industrial structure embark on the path of relatively balanced development. The term “three-dimensional industrialization” refers to a trend of industrialization in which all sectors climb towards the top of the industrial scale, which is characterized as being green, refined, and high-end. This will lead to a situation in which differential competition takes place throughout the various sectors of the economy, and in which the deep-going development of industries is achieved through technological innovation as opposed to the mere expansion of scale. For this to be possible, various differential industrial policies must gradually be watered down or even cancelled, and the realization of technological innovation through equal competition should be made possible in all industrial sectors, traditional, hi-tech, and emerging. 

2. The nature of economic policy must shift from the provision of preferential treatment to the establishment of a policy environment for fair competition. In particular, the government must create level ground for competition between different regions by reducing or even banning government subsidization that causes unfair competition. This is not only needed to reduce the anti-dumping and countervailing measures that foreign countries impose on Chinese goods, but is also a necessary course of action for addressing the imbalances in China’s industrial structure, and in particular, resolving the issue of excess capacity. 

3. Focus needs to be placed on the improvement of market mechanisms, with progress towards goals for the adjustment of the industrial structure being driven by fair competition between companies in the market. In an attempt to achieve the upgrading of the industrial structure on paper, the government has been quick to choose the winners through administrative interference in the market rather than leaving this to the selection mechanisms of the market, namely, fair competition. However, fact has demonstrated that the use of non-market based administrative means is unable to bring about the desired results in regard to the adjustment of the industrial structure. The main approach to industrial restructuring must be the establishment of systems and mechanisms that are conducive to the optimization of the industrial structure.  

4. There is no future for “flat expansion” in the development of strategic emerging industries, and this way of thinking and acting must therefore be avoided. Taking this flat expansion approach, some local governments began offering high subsidies for investment in so-called strategic emerging industries several years ago. However, this has come at a huge price, with a serious excess in production capacity having already emerged in these industries. The key to developing strategic emerging industries is to make breakthroughs in the development of core technologies, strengthen the development of institutions, and cultivate new markets. Given that emerging industries are characterized by the uncertainty of technological development and the high risk of investment, the government must refrain from offering high subsidies for the expansion of production capacity in any given industry based on a subjective judgment of where the mainstream technological path for that industry lies. Instead, it should allow companies to choose and optimize their own technological roadmaps through a process of independent technological innovation. 

5. At the present stage of industrial restructuring, it is essential that the government is vigilant against the dangers of doing “too much of a good thing.” In fact, much of the imbalance in China’s industries is the result of the government having taken favorable policies a step too far. Examples include the over subsidization of government-promoted investment projects and the blind pursuit of investment projects for which the necessary conditions are simply not in place. If we insist on subscribing to old ways of thinking as we approach the current phase of structural adjustment, even if we are fortunate enough to resolve certain problems, the result will inevitably be the emergence of many more new problems in their place. Therefore, the government must formulate well-thought-out policies on the adjustment of the industrial structure. It must avoid both the tendency to seek quick results, and the danger of overcorrecting problems.  

Particular attention must be given to the link that exists between imbalances in the industrial structure and the overall state of the economy. When the economic climate is favorable, the imbalanced and uncoordinated development of the industrial structure is not always apparent. Only when an economy is on the decline does this become an outstanding problem. In most cases, the problem of imbalanced and uncoordinated development causes short-term pressure, whereas the unsustainability of development pertains to long-term pressure. Therefore, China must set its sights on the long term as it seeks to adjust its industrial structure. It must set sustainability, namely, the international competitiveness of its industries in the long term, as its priority strategic target. Only then will China have accurately identified the strategic direction of its industrial restructuring. 

(Originally appeared in Qiushi Journal, Chinese edition, No.4, 2013)

Author: Academician of the Chinese Academy of Social Sciences and Director of the Institute of Industrial Economics

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