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China's growth challenge under new leadership



Throughout the just concluded 18th Congress of the Chinese Communist Party ubiquitous television screens in trains and metro stations broadcast a live feed of the Chinese assembly. Beijing's busy people, however, seemed not to pay close attention: for them, it was business as usual.

The Chinese public's indifference to their country's ceremonial transition of power is hardly surprising. All critical decisions were taken well ahead of the Congress, behind closed doors, with very little input from outsiders. This apparently seamless transition, however, is widely expected to usher in a complex and potentially difficult decade for China – and for the rest of the world.

China is at a turning point. With more than 100 million people still below the official poverty line and per capita income currently just over $6,000 in nominal terms, robust economic growth must be maintained.

Outgoing President Hu Jintao indicated that China's total GDP and per capita income should double by 2020, which will require 7.5 per cent average annual growth. Is this feasible?

Recent improvements in data for industrial production, fixed investment, and retail sales suggest that the Chinese economy, which had slowed in recent quarters, may already be on the mend. But the authorities remain cautious, given that China's economic outlook depends heavily on external conditions, which is the source of most current uncertainty. However, as things stand, most independent economists expect 7-7.5 per cent annual GDP in 2013-2017, while the International Monetary Fund forecasts a more optimistic 8.2-8.5 per cent rate during this period.

As we heard repeatedly during the Congress, China's leadership reckons that its biggest policy challenge in the coming years will be the shift from export-led growth to an economic model based more firmly on domestic consumption. This has now become a matter of urgency, as the United States and Europe are unlikely to provide much support to Chinese exports. Indeed, China is now expected to undershoot its 10% growth target for trade in 2012, even though exports to emerging-market economies were up by more than that in the first nine months of the year.

Income growth and a lower household savings rate are essential to the shift in China's growth model, and each presupposes key reforms.

For example, improving the provision of health care, education, and care for the elderly, and bringing it into line with the needs and expectations of the emerging middle class should encourage more households to allocate a larger share of their income to consumption.
Likewise, increasing the interest rates paid on bank deposits would enable savings to decline without loss of income.

At the same time, as China proceeds along the path toward a market-based economy established more than 30 years ago by Deng Xiaoping, policymaking has become more complex.

The economy needs to be steered in the desired direction without triggering instability, making correct sequencing and coordination of policy measures essential. As some Chinese colleagues told me, the success of reforms in the next decade will depend more than ever on good design.

In particular, the new leadership will have to attend to the linkages between the real economy and the expanding financial sector as it overhauls state-owned companies and liberalizes the banks. From commodities to financial assets, price formation should become more market-based and transparent, while capital allocation should become more efficient and the scope for rent-seeking and corruption should be reduced. Moreover, as the renminbi's internationalization continues at a steady pace, domestic liberalization should occur in tandem with deeper global integration.

In the coming years, the key issue, reflected in Hu's Congress-opening speech, will be the relationship between the state and the market. But reforms will continue to be top-down and gradual, especially in the financial sector, where most efforts will be concentrated in the next decade.

Many Chinese seem to believe that market discipline will bring fair competition and contribute to closing the widening gap between rich and poor. China's income distribution has become highly skewed: at 0.438, the Gini coefficient, which measures income inequality, puts the country closer to the United States than to northern Europe's egalitarian societies (with the exception of the United Kingdom). And the unjust allocation of resources, which has enriched so many politically well-connected individuals and families, has become more difficult to bear.


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