Interview: Expert says China on an economic turning point

China is on an economic turning point, facing the challenge of lifting the economy onto a new level, said Christian Goebel, political scientist and professor of Modern China Studies in the Department of East Asian Studies at the University of Vienna.

"I am especially interested in the fiscal policy and the question of how to reshape the economy," Goebel said Monday when talking about the annual session of China's National People's Congress that ended in Beijing on March 16.

"China has a very large historical challenge with the conversion of the economy. It decides whether China remains at the current level of development, or a production in a higher level is possible," he said.

"China is now at a stage where the prior nature of growth is not working anymore," Goebel explained the reasons for the slower economic growth.

"The factors that were once cheap -- for example land or labor -- have now become more expensive in China," Goebel said. That is why China is now facing the same challenge other countries once had: to lift the economy onto the next level.

The conversion of China's economy can be seen in the enhanced services sector. "This is a natural process," Goebel said, "The growth of a country always starts with the rise of agriculture. China had this in the 1980s. Then agriculture decreases and the industry sector is growing. At the next level the industrial growth in the manufacture industry becomes difficult because wages have risen."

In his mind, the productivity of China's economy, and the increase of its productivity as well as development of human resources are important factors of the future of an economy. "The next step is either a higher value industry, or the services sector," the professor explained.

Goebel sees a major opportunity for China in online trading. "The inhibition threshold of the Chinese population for new technologies is very low," Goebel said. The scientist also sees green technology as a promising opportunity for China.

The Chinese government has decided to increase the national deficit to 3 percent of the GDP, in order to finance the necessary changes in the economy.

"On the issue of national debt we have the same discussions in China now that we have as well in Europe," Goebel said, "There are two fractions of economists. Some say we need to invest with public debt, others believe that the state must save. This is Keynes versus Hayek," Goebel said.

Goebel thinks that a devaluation of the Chinese yuan in order to boost the exports is not a right medicine.

"With a decline of the yuan, China could produce more cheaply and could go back to the low-price production. However, a high inflation could be the dangerous consequence. That would be especially bad for the poor. Currently, the inflation is approximately 1 percent. I think that the government wants to stay there," Goebel said.

Meanwhile, the professor sees problems with the inefficient state-owned companies in the extractive industry.

"There are companies which employ tens of thousands of people and make no profit. Should they close the business?" the professor asked, "For the big companies in the coal and steel sector, a closure is of course very difficult. It would not be conducive to social or political stability" , Goebel said.

"Unfortunately, there are not many examples where a change in the industry worked well," Goebel said. In Germany the coal industry is still subsidized by the state. For example, in Gelsenkirchen in the Ruhr there is an unemployment rate of 20 percent, the professor said.

According to the social scientist, lower economic growth is not a big problem. "More important is the distribution of the economic growth," Goebel said.

"Having a high economic growth and an enlargement of the income gap at the same time should not serve the interests of China. The government will purchase a smaller economic growth to strengthen the low income," Goebel said, "This is the most important measure."

The announced investment from the government in the welfare system is very important to close the income gap, Goebel said. The aim of the government is to insure the entire Chinese population until 2020...This is a major challenge, partly because of the aging society in China. In addition, China is still in the development process," the professor added.

"In the recent years the design of the systems ran very well under the circumstances. It is a great achievement that a basic care was ensured. However, it is just a primary health care and is not comparable with the systems in Europe," Goebel said.

Goebel thinks that the strengthening of the internal market is very important for China. In China currently about 50 percent of the economic output flows into capital goods. The consumption is still very low, the professor explained.

"The question is how to increase consumption, while keeping the economy running and without taking on too much debt. This is very hard to cope with," he said.

Goebel believes that an increase of the minimum wage is the best way to increase consumption. It is very important to reduce the inequality not only for social but also for economic reasons, Goebel said.

"The government has to ensure that more people have money. If a small part has a lot of money, they cannot spend everything. The money will be at the bank and will be used for loans. That are available for a similar social class," the professor explained, "People who are willing to consume have not enough money to do it."

Another central point of the Professor is the innovation capacity of Chinese companies. China invested 2.5 percent of the GDP in research, while 87 percent of these investments are made by companies. "A large part of the amount goes into product design. There are much fewer investments in basic research," Goebel said.

"Only a few large companies like Huawei make investments for real innovations...This is too little. Even small businesses need to have innovations," the professor said.

The links between companies have to improve, Goebel said, "It can be seen in the Pearl River Delta already. The companies there are already linked well. However, the rest of China have to follow this model." For the professor, the main requirements for innovation are loans, skills, technology and education.

Goebel is fascinated by the huge urbanization plan of the government. He called it the biggest experiment of mankind. "This has never been seen in history. In principle, the whole of China is divided and major city centers with connections between them will be established," the professor noted.

The professor thinks that the idea to bring people and industries into a same place is very interesting. "That is very exciting and courageous. It could work, if there is a structure in which you both consume and produce regionally," he said.

Nevertheless, the urbanization process is a big chance. "The government could do a lot right, if they learn from the experiences in China and other countries," Goebel said, adding that "the Chinese government is always willing to learn. This is a very good thing." Endi