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June 2009
Financial Crisis Causes Rapid Industrial Structure Adjustment in China
Some areas in China remain relying on cheap labor resources for export-oriented economy since the time of economic reformation. Chinese industry with outdated technology and management faces severe challenge in the global recession. The oversupply issue is resulted from global financial crisis and the industrial structure in China over depending economic growth on exporting business and investment. However, it is high time for China to change the export-oriented economic development model while facing global recession. China should focus on industrial upgrade and structural adjustment to improve ability for innovation and to have science and technology built up as the engine of economic development.
Chuang, Chao-Jung
Development of industrial structure in China

Development of industrial structure in China has gone through four stages of process.

(I) Stage I (1978~1984): Rapid development of agriculture

The typical development of industrial structure at this stage is with the features of: The ratio of agriculture to GDP increased dramatically while the ratio of industry to GDP dropped dramatically. Apparently, the reformation of village and agriculture at the time had agricultural productivity released substantially activating agricultural development.

(II) Stage II (1985~1992): Rapid development of non-agriculture

The ratio of industry and service to GDP increased dramatically while the ratio of agriculture to GDP dropped dramatically. The allocation of resources at this stage is with labor force transferred from agriculture to industry and service; especially, the development of service was promoted.

(III) Stage III (1993~2005): Rapid development of industry

In general, the infrastructure includes the development of energy, transportation, and telecommunication facilities; also, the ratio of industry to GDP increased. The ratio of agriculture to GDP dropped below 20% in 1997; apparently, the ratio of heavy industry increased dramatically. Power, steel, machinery equipment, automobile, shipbuilding, chemical engineering, electronics, and construction material became the driving force of national economic growth (S.J. Lian, 2006). Chinese government had striven to reform state-run businesses and explore the development of private-sector.

(IV) Stage IV (2006~2008): Development of advanced and new technology and innovative and energy-saving industry

Industrial structure adjustment at this stage was with the pursuit of energy-saving, environmental protection, and safe development; therefore, enterprises with high polluting and high energy-consuming manufacturing measures, equipment, and outdated technology would be retired. Especially, small businesses with inefficient development resources, environmental pollution, and unsafe production would be terminated. Advanced and new technology, innovative enterprises, and the development of environmental protection and energy-saving industry are encouraged in this industrial structure adjustment. China was with overheating investment in the second half of 2005; therefore, the industry of steel, electrolytic aluminum, metal alloy, calcium carbide, and coke, copper, automobile was with supply surplus. Moreover, the industry of cement, power, coal, and textile industry was also with the potential risk of supply surplus. Structural adjustment is with a focus on two aspects: First, resolve shortage and supply surplus; second, resolve the issue of allocating production elements and promoting industrial upgrade (S.J. Lian, 2006). Financial crisis in 2008 had affected exporting business significantly; therefore, the stable development of Chinese economy was affected too. The effort of promoting industrial upgrade and developing domestic demand industry is undergoing.

Impact of financial crisis on Chinese industry
Exporting business growth in China has been sliding since August 2008 due to the impact of financial crisis and with a negative growth resulted in November for the first time. The GDP had dropped to 6.8% in 2008Q4 beyond the tolerance of Chinese government. Exporting business had dropped by 21.1% up to February 2009, in which, machinery and electronic products had dropped by 21.8% and advanced and new technology product had dropped by 24.6%. Exporting business kept on sliding that meant for more factories to go out of business and higher unemployment rate resulted. There were over twenty million agricultural workers lost their jobs in the exporting business in China. The 2nd People Assembly of the 11th year was held in early March 2009. The Premier of China, Mr. J.B. Wen, declared that the government would fight to maintain the level of 8% growth in economy in 2009. The said declaration is to maintain the growth of employment rate so to avoid excessive unemployed population and the consequence of social disorder.

The impact of financial crisis is not only on exporting industry in China but also on Asian nation’s exporting industry. If the global recession resulted from financial crisis could be recovered as quickly as before, Asian nation’s exporting business could recover its growth quickly too. However, the global financial tsunami resulted from real estate bubble and sub-prime mortgage crisis in the United States led the developed nations into recession. Apparently, the export-oriented nations would not be able to activate economic growth with exporting business in 2009. For China, economic growth in the first two months of 2009 remained with a record of 26.5% due to the investment of RMB 4 trillion in fixed assets in rural area. The growth of total consumable goods sales is slowing down with a record of 15.2% documented. Chinese government may need more than promoting domestic demand to achieve the goal of 8% economic growth while lacking of the help of exporting growth.

Chinese government needs to proceed with systematic reformation in order to promote the growth of domestic demand and it does take time. Therefore, increasing exporting in a short run remains the short cut to promote economic growth.

The path China takes to economic growth

Since the practice of activating economic growth with exporting business does not last, Chinese’s economic growth relies on domestic consumption; also, domestic consumption focuses on the breakthrough of service industry. Chinese government needs to proceed with systematic reformation in order to promote the growth of domestic demand and it does take time. Therefore, increasing exporting in a short run remains the short cut to promote economic growth. However, Premier, Mr. J.B. Wen, said at the National Assembly that RMB would remain “basic stability.” The currency of RMB devalues slightly; therefore, it does not help exporting business significantly under the circumstance; however, it could cause a large scale of and affect the stability of capital outflow; also, it could awake the consciousness of protectionism in the trade opponent nations. Chinese government is trying other measures to help exporters, for example, reduce exporting tariff, increase exporting tax refund rate, and offer financial support.

The pressure on RMB valuation is on under the circumstance of continuing capital control and foreign reserve accumulation. The most effective measure to prevent significant valuation of RMB is to allow citizens having capitals out of the country with them. Therefore, the reserve of China Bank will go down, the ability to grant low interest loan will go weak, the growth of investment will go slow, and economic growth will alleviate. At the same time, the valuation of RMB will cause its buying power to go up, domestic price to go down, and Chinese produces price linked to world price will drop; therefore, farmer’s income will go down too. Chinese agricultural productivity is low; therefore, farmers’ income is barely keeping them staying ahead. The valuation of RMB will cause farmer’s income to go down (Hutton, 2009). Therefore, Chinese government must have capital control reformed dramatically in order to prevent RMB from valuation while facing the accumulating exporting and exchange reserve. Chinese’s exporting business had suffered a negative growth in November 2008~January 2009. However, the negative growth of importing is more severe; therefore, an exporting surplus of US$40 billion a month and a growing foreign reserve was resulted. Both importing and exporting business suffered negative growth in February 2009 and exporting surplus was minimized to US$4.84 billion. The pressure on RMB valuation could be eased up while increasing importing and exporting business.

The main industrial recovery plan of China (2009~2011) is to expand domestic demand and investment in order to stimulate economic growth; also, to conduct industrial upgrade and structure adjustment in order to reinforce perpetual development competency.

Activate domestic demand with industrial recovery plan

Some local economic development in China remains relying on cheap labor resources for export-oriented economy since the time of economic reformation. The said high economic growth comes with the price of many conflicts and problems including high energy-consumption and high pollution exchanging for low production cost. In other words, the economic growth came with the price of scarifying ecosystem. In fact, Chinese businesses and industry with rough, low-end, and outdated technology and management have sustained the most severe impact in global financial crisis. The oversupply issue is a result of global financial crisis and the industrial structure of Chinese over depending economic growth on exporting business and investment. However, it is high time for Chinese to change the export-oriented economic development model since the environment cannot sustain abuse any longer; also, China must have the way of economic growth changed in order to have its competitiveness upgraded internationally (F. Wang, 2009). J.L. Wu, a famous Chinese Economist, said “the administrative hinder keeping China from changing its economic development with resources input and exporting driving force must be reformed.” The reformation of industrial structure can wait no longer while facing the challenge of financial crisis.

Industrial recovery plan is an action plan for stabilizing development and for structure adjustment (2009~2011). The theme of industrial development in 2009 is expanding domestic demand, securing economic growth, and adjusting structure integrated. While stimulating economic growth with more investments, the industrial policy in this stage is to have economic structure refined and adjusted (S.S. Chen, 2008). Does the financial crisis provide China with a grand opportunity to speed up structural adjustment and industrial upgrade? Mr. F. Fong, Minister of Research Institute for Industrial Economy, R&D Center, State Council, said that industrial structure must be refined and adjusted and sustainable development ability must be reinforced in the process of expanding domestic demand. Industrial adjustment takes time and it is a difficult task in the expansion period then and it is time to do it now. Specialists think that perpetual economic growth is guaranteed with rapid industrial upgrade and innovation. Global recession provides China with a grand opportunity to focus on industrial upgrade in order to upgrade Chinese’s ability for innovation and to have science and technology built up as the engine of economic development.

State Council has proposed ten industrial recovery plans at the beginning of 2009 that demonstrates the determination of Beijing Administration in securing economic growth. The said 10 industrial recovery plans include: Steel industry is to speed up retiring outdated production capacity and promoting industrial syndication and reorganization; automobile industry is to support industrial technology innovation, technology reformation and automobile with new energy, and develop brand name; textile industry is to adjust up exporting tariff credit and increase the loans support for technology reformation funds and current funds; equipment production industry is to support the syndication and reorganization of infrastructural industry; vessels industry is to retire outdated production capacity; electronic information industry is to collect strength for integrated circuit board upgrade, new display and color TV industry transformation, 3rd generation mobile communication industry breakthrough, digital TV promotion, computer upgrade and next generation Internet application, software and information service incubation six-project, encouraging and directing social funds to electronic information industry; light industry for the benefit of 45 sub-industries, expanding consumption in urban and suburban, increasing product exporting tariff credit rate further, increasing support to fiscal tax and credit loans of small and medium enterprises, reinforcing the policy of expanding home appliance in rural area, and speeding up the technology reformation of paper industry, home appliance, and plastic industry; petrochemical industry is to adjust and control total production for industrial deployment and prompt technology upgrade; nonferrous metals industry is to have outdated productivity retired and to construct national reserve mechanism; and logistics is to adjust down business tax rate and alleviate the impact of financial crisis. The said 10 industrial recovery plans are mainly focusing on completing the unfinished industrial structure adjustment in Stage IV (2006~2008).

Prospect of industrial structure adjustment in China

China has suffered the record high fiscal deficit for an amount of RMB 950 billion in 2009; however, it is tolerable. The economic stimulation plan for an amount of RMB 4 trillion announced in November 2008 has been initiated in 2009. The 10 industrial recovery plans announced by the State Council at earning of 2009 shows the determination of Beijing Administration in securing economic growth and promoting industrial structure upgrade. How to carry out and substantiate scientific and technical development? The mission of economic recovery is to maintain stability and promote economic development. Reinforce and improve macro-control. Strive to expand domestic demand, especially, consumption demand. Work to transform development, speed up economic structural and tactical adjustment, deepen reformation, increase economic openness, improve living standard, promote social harmony, and promote socialism economic construction. The year of 2009 is the crucial year for the realization of the “11th Five-year plan.”

Mr. S.H. Wu, international business consultant (2008), said that the effort of improving industrial structure may not jeopardize manufacturing industry. On the contrary, the mission is to secure the core competence of manufacturing industry and to center on manufacturing industry for expansion to other industries. In other words, China is to develop service industry with top priority that helps improve the prosperity of manufacturing industry and increase the profitability of manufacturing industry including brand name, R&D, and financial service, which is the true scientific and technical development. For the healthy and harmonious development of agriculture, industry, and service, it is necessary to form agriculture as foundation, advanced and new technology as lead, infrastructural industry and manufacturing industry as support, and an industrial deployment with comprehensive service development. The realization of sustainable development relies on an energy-saving, clean, and safe development. Chinese’s economy has faced severe challenge for the first time since its entering the new era; therefore, the mission is to maintain stable reformation and development.

(The author is the Director of Chinese Industrial and Economic Research Center, Taiwan Institute of Economic Research)

■ References
1. F. Wang, “Industrial structure adjustment is the key for Chinese to defense financial crisis,” Financial Times, http://www.chinareviewnews.com, February 23, 2009.
2. S.S. Wu, “Improving industrial structure may not jeopardize manufacturing industry,” Nanfang Daily, http://www.chinareviewnews.com, November 26, 2008.
3. Will Hutton, translated by T.Q. Lin, The Writing on the Wall – China and the west in the 21st Century, YLib, January 2009.
4. S.S. Chen, “Industrial policy: Combination of economic growth and structural adjustment,” China Economic Times, http://www.sina.com.cn, December 5, 2008.
5. S.J. Lian, “How should Chinese’ industrial structure be adjusted?” China.org.cn, quoted from Beijing Review, March 3, 2006.