III Difficulties and Challenges in China’s Economic Development during 13th Five-Year Plan Period

A External Difficulties and Challenges in China's Economic Development during 13th Five-Year Plan Period

During the 13th Five-Year Plan period, there are both favorable and adverse factors for China’s economy development in the international environment. Generally speaking, the adverse factors are increasing, while the favorable ones are decreasing. International environment becomes increasingly severe, and China’s development restraints become increasingly rigid. In particular, the exclusive new regional trade pattern, the changes or transition of attitudes of leading countries toward China, the harassment of the neighboring countries to China’s sea areas, and the potential risks of energy supply pattern are unfavorable factors that the international environment exerts on China during the 13th Five-Year Plan period brings about great uncertainty.

World Political and Economic Pattern: Economic Globalization Slows Down But International Competitiveness Intensifies

In view of external environment of China, it continues to compete with developing countries regarding transnational labor-intensive areas, while the competition with and replacement of developed countries has fully taken place in capital- and technology-intensive sectors. During the 13th Five-Year Plan period, with the continuous growth of China’s economic competitiveness, the relations between China and developed, developing, and neighboring countries continue to change. China will probably usher in the most rigid international environment. It is inevitable for China to confront complicated challenges and attacks from developed countries and emerging economies in export of technology-intensive, capital-intensive, and labor-intensive products.

(1) RELATION BETWEEN CHINA AND DEVELOPED COUNTRIES: COMPETITIVE DISPLACEMENT OVER REGURGITATION FEEDING EFFECT

Owing to the changes of labor supply-demand relation, accumulation of capital accumulation and technical progress, and displaying of superimposed effects, China will expedite its transformation from labor-intensive industry to that of capital- and technology-intensive one. China’s exports are transforming from the pattern of resource-consumption and rough process to deep-processing with high technology. China’s competitors are thus gradually shifting from developing countries to developed ones. Essential changes are taking place in the relations between China and developed countries, from the original basis of complementarity to the coexistence between complementarity and replacement, and even to the new period of replacement dominance. Since the international financial crisis in 2008, developed countries, led by America, put forward a series of medium-long strategies to reinvigorate national economy and boost domestic demand, with relation of competitiveness or anti-competitiveness with China. As China’s enterprises expedite their pace of going abroad, it is repaying developed countries in restructuring of infrastructure and traditional industries, but generally speaking, with greater replacement effect than repaying effect. It is more and more obvious for China be one of the developed states in capital-intensive and technology-intensive sectors, so is it obvious that the developed countries will make anti-competitive practice against China.

(2) POSSIBLE CHANGES IN ATTITUDES OF LEADING COUNTRIES TOWARD CHINA

With China’s further development, essential changes have taken place in its position in world economy, which will affect the relations between China and world’s leading countries. Major changes will appear in the basic attitudes of the leading countries toward China. It is possible a worse conflict happens between China and the USA than the US-Japan trade friction in 1980s. Concerning the different economic cycles between both countries, America’s economy might step into propriety, while China will be trapped in low growth because of conversion of growth drive in the next five years or so. The wax and wane of power comparison will lead to adverse impacts on China, with competition and frictions more intense than those of US-Japan trade in 1980s, but evidently different from US-Soviet confrontation, which is possible to recur in trades between China and USA. Leading countries will continue to adopt strategies of anti-competition, exclusion, and containment against China. Since 2008, the United States of America has implemented re-manufacturing, which in some sense is anti-competition against China. In addition, they currently put forward the new trade system arrangement with exclusive features to exclude China out of world trade. For example, they established the regional trade organization, TPP and TTIP, with higher standards and stricter requirements, and even targeted terms to directly squeeze China out and start regional anti-competitiveness that is against globalization. As China competes with all countries in all industry chains at present stage, these countries with developing or developed economy consider China as their public enemy. Developed countries are keen to build new trade barriers through regionalization for extensive response, which makes the restraints to China’s development become increasingly serious.

(3) RELATION BETWEEN EMERGING MARKET AND CHINA: PRODUCT COMPETITION AND SUBSTITUTION BECOMING EVIDENT

As the camp of emerging economies is growing, the relations between the emerging market economies tend to be double-edged. On the one hand, the later emerging economies are bound to compete with traditional ones in exporting products. China will be the first to suffer from such situation. On the other hand, the transfer of industries between emerging markets will form the division of labor between upstream and downstream industrial chains. China will also join it to accelerate its “going outside” process. During the 13th Five-Year Plan period, the later emerging states compete with China in the following three aspects. First, the low-cost emerging economies compete with China in labor-intensive products, focusing on labor-intensive industries due to the limits of educational years of working-age population and industrial supporting capacity. They compete with China in labor-intensive industries. Second, the competition resulted from non-traditional competitive forces, such as transfer of industries based on politic factors, which has led some industries or technology that could have been transferred to China to be transferred to other countries under the influence of human factors. Third, the emerging markets compete with China’s market in production factors such as resource and energy. During the 13th Five-Year Plan period, the competition and replacement policies of the later emerging economies against China are in line with China’s industrial transfer policies, which develop complicated relations between China and the later emerging markets.

B Difficulties and Challenges of China’s Economy during the 13th Five-Year Plan Period

Agglomeration Change of Labor Supply and Demand Relations Weakens Traditional Comparative Advantage

As China’s Lewis turning point is coming, labor supply and demand relations are changing from infinite supply via labor to finite supply via labor. As labor cost continues to increase, China quickly lost its competitive advantages in labor-intensive industries. Meantime, as ratio of aging population increases, China is stepping into an aged society. The saving rates thus tend to decrease, while capital costs are on a rise. On the one hand, compared with the later emerging economies, China’s advantages in labor-intensive industries are evidently reduced. On the other hand, compared with the developing countries, China’s cost advantages in capital- and-labor intensive industries are obviously weakened.

Rise of Environmental Restraints Provides More Challenges for Supply of Resource and Energy

The occurrence of haze further highlights the severity and urgency of environmental problems. During the 13th Five-Year Plan period, the environmental restraints against economic development are on a rise and, to a certain extent, correspondingly reduce the potential growth. At the same time, with the sustainable development of China’s economy, if there is no significant breakthrough in energy conservation and utilization, the external dependence on resource and energy will continue to increase. In the context of increasingly complicated international environment, especially when geopolitical situation fluctuates, the increasing uncertainty in China’s oil production, procurement, and transportation grows.

Economic and Financial Risks Increase Macroeconomic Uncertainty

Owing to the imbalance between financial system reforms and economic development, the financial system compatible with China’s rapid economy growth and specific low-cost expansion model has not been timely established. As a result, risks have been accumulated in financial sectors, including local government financing and off-balance sheet business of “shadow banking” of commercial banks. In the process of rapid economic development, traditional indirect financing system centered by banks is rapidly expanding in the context of its high growth. Meanwhile, direct financing in emerging transformed markets is restrained from congenitally deficiency and has not been fully developed in time, which has led to the constant rise of liability ratio of the whole society. In addition, the reform and development of real estate market is not well converged, with the welfare housing and market-oriented housing systems lacking appropriate transitional and convergence of institutional arrangements. Furthermore, the sharp imbalance exists between distribution and accumulation of wealth. All of the abovementioned led to bubbles to some extent in real estate markets. If the leverage ratio further rises, new asset bubbles might occur. However, deleveraging and deforming might cause a sharp decline in economic growth and affect the sustainable and stable economic growth. In a sense, economic and financial risks have been major and certain factors that restrict economic development and macroeconomic regulation.

Social Problems and Other Non-Economic Factors Grow

Although contradictions have been accumulated during China’s rapid economic development, they are often covered by rapid growth or solved by the resulted dividends. With the slowdown of China’s economic growth, some problems might come out in the wash and become restraints against intensification and stabilization of economic development. Of particular note, the deepening of public mental tolerance on income distribution and environmental problems declines or regresses, and the public expectation to higher income constantly increases in the future. At the same time, the pursuit of quality life has made the new generation migrant workers’ attitudes toward work greatly different from their predecessors, which also has negative effects on supply of production factors and economic development environment.