22 October 2016
Steven Cheung has pointed out key problems facing the Chinese economy, but his solutions may be a bit unrealistic. Photo: People Weekly
Steven Cheung has pointed out key problems facing the Chinese economy, but his solutions may be a bit unrealistic. Photo: People Weekly

There are no easy solutions for China economic woes

Hong Kong-born American economist Steven Cheung Ng-sheong (張五常) recently gave a speech at Guangzhou’s Sun Yat-sen University, pointing out that the Chinese economy is in a deep crisis.

During the speech, Cheung outlined three solutions, which I deem to be somewhat fanciful though the prescriptions no doubt reflect the troubles in the Chinese economy.

First of all, Cheung suggested that the Labor Contract Law, which came into effect in 2008, was a chief source of pain for Chinese manufacturers and should be done away with.

He mentioned his own experience of running a manufacturing business in China.

Cheung said he faced trouble as he sought to continue operations at his polishing wax factory in Jiangsu province as the product had been invented by his father.

But the Labor Contract Law caused pain as it meant a rise in operational costs, he said.

He was not exaggerating.

Under the labor law, the factory owners have the obligation to pay an extra 80 percent of the amount the workers really put into pocket as the workers’ compulsory insurance premium and allowances.

For example, if a worker earns 4,000 yuan a month, the employer has to pay an additional 3,200 yuan worth of insurance premium and allowances to the worker. Such high cost has been squeezing manufacturers and prompting them to either shut down factories or relocate to Southeast Asian countries.

Cheung suggested that China should provide an arrangement similar to the United Kingdom where parties can opt out of such contracts.

Such system allows certain level of flexibility on employment contracts if agreement is reached voluntarily between employers and employees.

Now, let me make my point. If such system is adopted in China, most would prefer a more flexible contract, which may effectively mean scrapping the labor law.

Authorities will not allow that to happen.

Secondly, Cheung believes the highly volatile renminbi exchange rate seen lately is a side effect of the currency’s internationalization.

His solutions are 1) move slowly on the internationalization in order to maintain a stable currency; and 2) do not peg renminbi with the dollar or even a basket of currencies.

The renminbi should be pegged with a basket of commodities, for example oil, gold, among others, he suggested.

Both the suggestions, I feel, are unrealistic.

As President Xi Jinping once remarked: “There is no turning back if an arrow is released” with regard to renminbi internationalization. Also, there are no precedents among major economies of adopting a “commodities pegged” currency system. 

Lastly, Cheung noted that Beijing’s anti-corruption campaign is another major reason that led China to the present troubles. He believes corruption was a by-product of China’s opening-up moves in the past decades.

The economist once said that corruption was like a lubricant to China’s economy, greasing the wheels of decision-making.

According to Cheung, China needs to reform the entire system, realize a genuine decentralized structure and create a proper incentive system for officials if it wants the anti-corruption efforts to benefit the nation overall.

Without a systematic reform and by just taking out the “corruption” element from the system, the officials may lose motivation to step up their act, which could drag down the overall economic efficiency.

The implication is that China should slow down the pace of the anti-corruption campaign until broader reforms are put in place.

Now, this is also unrealistic as such move will be deemed “politically incorrect” by Beijing.

China’s current economic situation is very complex. Understanding where the problems are does not mean that we can have quick-fix solutions.

Coming back to Cheung, while his solutions may not be realistic, he needs to be commended for highlighting the three issues — high costs for manufacturers, renminbi stability, and government efficiency — that deserve a closer look in China.

This article appeared in the Hong Kong Economic Journal on Jan. 26.

Translation by Myssie You

[Chinese version 中文版]

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