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Panel Detail:

Monday, April 28, 2008
11:00 AM - 12:15 PM

China's Balancing Act: High Growth vs. Sustainability

Moderator:

Perry Wong, Senior Managing Economist in Regional Economics, Milken Institute

Andy Rothman of CLSA Asia-Pacific Markets and Bobby Chao of DFJ DragonFund China analyze China's quest to build a more economically, socially and environmentally sustainable society.

Andy Rothman of CLSA Asia-Pacific Markets placed the new development in the context of several waves of policy and economic growth. In the 1980s the trend was capitalizing on cheap labor, while increasing privatization defined the 1990s. Now, in this third wave, China has clearly decided "we no longer want to be the world's sweatshop for junk." This means closing down factories that use dirty old technology or pay below minimum wage, ending export subsidies and preparing to take the economic hit that will come with restructuring industry. It also means getting past the problem of "lacking a leading ideology other than to get rich," as Jim McGregor of JL McGregor & Company put it.

Despite a reputation for announcing broad goals and then failing to meet them, the central government is serious this time, according to Rothman, and it appears they will be effective in their new aims. Specifically, they are actually working to change the incentive structure at the local level, so that, unlike with many past initiatives, it is now the case that "political and career incentives now aligned with policy."

Rothman later illustrated the importance and effectiveness of this incentive alignment with a stark example. In visiting many cities around China several years ago, he noted a conflicting response to two high-level directives: one to close down high-tech zones, and one to close down steel mills. There was 100 percent compliance in shutting down high-tech zones, but zero compliance for the steel mills. It turned out that those responsible for implementing the changes would be "sacked tomorrow" if they didn't shut down the high-tech zones, while little incentive was put in place to comply with the steel mill directive. The government has now recognized the important role of these incentives and is using this mechanism to ensure compliance at lower levels, though "extreme party discipline at all levels" will still be required, according to McGregor.

"The Chinese government is not as powerful as we believe," posited Bobby Chao of DFJ DragonFund China. McGregor agreed, pointing out that even within the central government, "People who run China today are not dictators. They're people who have to operate on consensus." However, he added, when it comes to implementation, leaders tend to be more powerful in their second term after they have gained more influence relative to lingering appointees from previous administrations — thus we can expect the central government to further pick up the pace of implementing its change the longer Hu Jintao remains in power.

A healthy environment is central to sustainable growth and China's vision of a harmonious society. On this topic, Wong suggested that perhaps China has suffered "a confusion between growth and development."

James Boettcher of Focus Ventures agreed, but with some optimism about China internalizing the message and working to address it. According to him, the Chinese realized "we cannot follow the paradigms that the West followed for the last 100 years." They now recognize the need for innovative and leapfrog technology to allow growth without negatively impacting their environment and health. There are signs of this in many places, including the goal of producing five gigawatts of wind energy by 2010 (a benchmark they expect to meet early). Boettcher also highlighted the importance of cleanly utilizing coal, and combining coal with fuel-cell technology to essentially double the efficiency of one of China's primary resources.

Environmentally friendly technology is not the only element of balanced growth. Chao characterized several types of "old" growth models for China, most of which were focused on some combination of low-cost labor, imitating other business and capitalizing on local markets. The goal now is to aim for world-class innovative technology for global markets — and that will require more intellectual capital, intellectual property rights and venture capital. Chao neatly summed up what is happening as China transitions to a new mode of growth: "They've become pretty smart now."

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