Although China’s investment-driven development model has led to rapid growth, in recent years it has produced diminishing returns. Government investment and stimulus spending has also contributed to overcapacity in Chinese industries such as steel, cement, and construction. In order to ensure sustainable growth over the long term, China must transition to a new economic model.
At the 2015 Imperial Springs International Forum, Carnegie–Tsinghua’s Paul Haenle moderated a discussion with Liu Ke and Liu Ge about how China’s economic transition is altering investment prospects in China, particularly in emerging sectors such as clean energy technologies.
- Modernizing Despite Resource Constraints: Given China’s massive population of roughly 1.4 billion people, one panelist noted that the country’s efforts to respond to citizens’ growing material demands must be balanced with the country’s finite resources. He observed that the West has had over a century to develop industrial knowledge and technical prowess to allocate resources efficiently and anticipate future growth trends, whereas China’s modernization has occurred far more rapidly. As a result, China’s regulatory capacity remains limited. A panelist suggested that viewing development in terms of quality of life rather than growth for its own sake may help China to modernize in a more sustainable fashion.
- Industries in Transition: One panelist said that some Chinese companies and investors seem to have underestimated the amount of time it will take for China to restructure its economy. He pointed out that some Chinese companies grew accustomed to profitability in specific markets and have struggled to adapt to evolving market conditions. For example, he cited a railway-car producer that enjoyed high sales volumes for several years. As labor costs rose and sales declined, though, it did not shift production until it was too late. When they tried to produce transport trucks instead, they struggled to adjust to the high technological and safety demands of a new industry. One audience member suggested that simplified bankruptcy regulations may help Chinese firms to reallocate capital and labor more efficiently as some firms fail and new ones emerge.
- Responding to Trade Shifts: One panelist asserted that many Chinese officials and business leaders were surprised that the United States and the other eleven Asia-Pacific countries negotiating the Trans-Pacific Partnership (TPP) trade agreement were able to reach a deal. While Chinese experts have different opinions about how this development will affect China, some believe that the TPP is a way for foreign firms to gain a competitive edge over Chinese counterparts, pointing out that countries less developed than China—including economic competitors like Vietnam—are part of the agreement. This same panelist acknowledged that it would be difficult for China to join TPP in the short term, but that China should maintain a positive outlook on trade.
- Opportunities in the Energy Sector: Panelists agreed that China’s energy sector offers abundant opportunities for investment despite the country’s slower economic growth rate. This sector is so vast and diverse that no single energy source is likely to dominate the market. One panelist suggested that China’s energy demands are gradually shifting away from coal and oil due to the pressures of climate change, as reflected in President Xi Jinping’s recent national cap and trade policy announcement. He suggested that China’s use of liquid natural gas will continue to grow gradually, opening up opportunities for businesses to help create a more flexible transport system by making pipelines, tankers, and other equipment. The panelist also suggested that nuclear energy will continue to play a key role, particularly if innovative solutions are found to the issues of safety and waste disposal. Renewable solar, wind, and hydropower technologies will play a limited role as they still account for a relatively small share of China’s energy production.
Paul Haenle is the director of the Carnegie–Tsinghua Center based in Beijing, China. Prior to joining Carnegie, he served from June 2007 to June 2009 as the director for China, Taiwan, and Mongolian Affairs on the National Security Council staffs of former president George W. Bush and President Barack Obama.
Liu Ke is vice president of government relations and technology collaboration in China for Haldar Topsoe, an industry leader in clean energy technology. He is also a partner at the venture capital firm Enverra Capital and serves as a member of the Carnegie–Tsinghua Center Advisory Council.
Liu Ge is a senior CCTV reporter, economic commentator, and author specializing in finance. He previously served as the editor-in-chief of two programs on the CCTV finance and economics channel (CCTV 2): “Dialogue” and “Chinese Finance Report.”