THE “Two Sessions” of China’s National People’s Congress gathering last month marked the 40th anniversary of China’s reform and opening up which led to its transformation, furthering the China Dream of socialism with Chinese characteristics.
Rapid modernisation has propelled China from being the world’s factory to one steeped in science and technology that will drive it for much of the 21st century. A pre-requisite policy has been its commitment to strengthen the government system by fiercely fighting corruption, to keep the political ecology of China clean, so to speak.
This means creating clear checks and balances to level the playing field for both takers and givers in the fight against corruption. For the system to work, clean government is critical to ensure fundamental economic and social reforms (including restructuring of central and local governments) are carried through.
This ushers in an era of Chinese socialist modernisation and governance-guided by ideologies of Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory and the Theory of Three Represents: defining features of socialism with Chinese characteristics. This approach adapts Marxism to a Chinese context and encapsulates the practical experience and collective wisdom of the Communist Party of China (CPC) and the people.
China still needs to grow rather fast to meet its current objective of becoming a “moderately well-off society” by 2020, in time for the following year’s 100th anniversary of the founding of CPC – it still needs to double the 2010 GDP per capita income level.
Next, there is the long-term, two-stage development plan. The first stage (2020-2035) is devoted to becoming a global technology leader through the realisation of socialist modernisation, including meeting the Belt and Road Initiative.
The second stage (2035-2050) is to develop China into a great modern socialist nation, that is prosperous, strong and culturally advanced. Included is China’s vision of innovative, coordinated, green and open development for all; of the five-sphere integrated plan for co-ordinated economic, political, cultural, social and ecological advancement; and the goal of a great socialist nation.
I recall in 2007, Premier Wen Jiabao argued rightly that “the biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated and unsustainable”. What a difference 10 years make.
This year’s “Two Sessions” gave priority to the overall development of the economy – stressing quality of growth over the mere quantity of growth. Development will need to be broader-based; what’s needed is more inclusive development beyond the growth of a number. Priority is to be given to measures to reduce poverty, to deal with the environment and to tackle the nation’s debt problem. GDP in 2017 rose 6.9%; it is expected to moderate to 6.7% in 2018 (6.8% in 1Q18), and to a slightly lower growth rate of 6.6% in 2019.
More attention will be given to consumption that can result in investment as well as boost sustainable industrial production. Labour shortages are leading to higher wages and higher productivity. Growth needs to be more evenly spread regionally.
Still, China has to create more than 11 million new urban jobs this year. Savings need to fall and working hours adjusted to give a better work/life balance. Already 68 million have been lifted out of poverty over the past five years (8 million alone in 2017), including close to 9 million relocated from inhospitable areas.
Poverty is down to 3.1% and personal income rose at an annual average of 7.4%. The stress on high-quality growth has led to increased tolerance of slower economic expansion – leaders are now more relaxed with the speed of growth: around 6.5% is okay according to Prime Minister Li Keqiang.
More talk on innovation-driven growth – about more institutional innovation and to make available more resources to build a large talent pool to bring about innovation. Areas highlighted as of “quality” in 2018 include preventing systemic financial risks, poverty relief and environmental protection.
Many continue to worry that China’s past growth was achieved through aggressive credit expansion and debt financing. National debt to GDP is already 295% in 3Q17 (according to Institute of International Finance). That’s why deleveraging is important. Then, there is the need for more inclusive growth.
Hence, poverty relief and reducing income and wealth inequality are important to enhance quality growth. Next comes the need to do much more to protect the environment. How to bring all these about remain China’s major challenge.
So far, the Chinese way has worked well to make China a middle-income economy. To go beyond, it needs to continue and possibly accelerate the process of structural reforms. For China, sustainability involves shifting from resource-intensive manufacturing to resource-light services. It is here that China can enjoy the quality dimension of the growth experience. It has achieved significant rebalancing so far, with services rising from 43% of GDP in 2007 to 52% in 2016.
In the process, there is increasing concern about China’s mounting debt, particularly that built-up by state-owned enterprises (SOEs). According to the Bank of International Settlements, corporate debt account for 60% of the rise in China’s debt since 2008. SOE reform holds the key to any deleveraging and in reducing the worrisome debt intensity.
Reforms include the restructuring of SOEs and the closure of zombie companies, highlighting measures such as capacity reduction, introduction of strategic partners, incentive plans, public listings and debt-equity swaps. Priority emphasis remains in continued structural rebalancing in other important areas, from exports and investments to consumption growth, focusing on indigenous innovation. Latest indications point to final consumption contributing 59% of GDP growth in 2017.
As a result, investment growth has fallen; rise in indebtedness has apparently stopped. It looks like consumption is, at last, becoming the main driver of Chinese demand. A recent European Commission report highlighted that China’s leading companies’ spending on research and development (R&D) rose by 18.8% in 2016, more than double the 7% rise in EU and 7.2% growth among top US companies.
History teaches that nations can avoid being caught in the middle-income trap by shifting focus from importing foreign technologies to developing indigenous homegrown ones. To succeed, innovation-led growth in China needs a robust, modern education system to produce the needed human capital to absorb continuing high R&D spending, as well as establishing a Silicon Valley-like start-up culture supported by a flourishing venture capital industry.
To succeed, China has to be a dominant player. Size matters.
According to the IMF, China’s GDP per head in 2017 was 14% of US levels at market prices and 28% at purchasing power parity (PPP), up from 3% and 8% in 2000. Yet, since China’s population is more than four times that of the US, its GDP in 2017 was 62% of US levels at market prices and 119% at PPP.
Assume that by 2040, China achieves a relative GDP per head of 34% at market prices and 50% at PPP. This would imply a dramatic slowdown of the rate it is catching up. China’s economy would then be almost twice as big as that of the US at PPP and almost 30% larger at market prices. This would still leave China far poorer, relative to the US, than Japan or South Korea – the fast-growing East Asian economies of the past.
According to the IMF: China’s fiscal system is the world’s most decentralised, with local bodies responsible for 85% of government spending, covering 31 provincial governments, 334 prefectures, 2,850 counties, 40,000 townships and 900,000 informal village jurisdictions. Including their off-budget spending, the ratio rises to 89%.
Such a complex network will need to be overhauled to better deliver services, increase social spending and reduce regional disparities. Among others, deep reforms will allow China’s government to improve social safety nets and better protect citizens from adverse economic and health shocks. In turn, this would improve welfare and promote consumption and economic rebalancing. Much work remains to be done.
Good times won’t last, the IMF warns, as it predicted a global slowdown likely to be accompanied by trade wars. In its sombre World Economic Outlook, the fund highlighted the “jarring contradiction” between broad-based growth momentum and a “similarly broad-based conflict over trade”. The fund urged nations to use the “window of opportunity” to carry out reforms to boost growth rates before the current upswing – the strongest since 2010 – petered out.
I think the global economy has already hit a soft patch as seen from weak industrial data in 1Q18 (particularly in Europe) and global weakness in business activity surveys. Still, despite its poor forecasting track record, the fund predicts a bright 2018 and 2019.
Understandably, China has since taken a pre-emptive move against its ebbing growth momentum to signal the banks on April 2017 to begin to lend more amid rising trade tensions. It appears to be aimed at bolstering growth and alleviating concerns about the potential effects of the mounting trade fight with Washington.
What then, are we to do
It is right that China accords priority to the quality of its development – stressing poverty eradication, fostering innovation, cleaning up the environment and keeping a lid on debt. Its increasingly service-driven economy is more employment-intensive. With the labour force now shrinking and population ageing, real wages have soared, raising the share of labour in national income.
Indeed, the share of household disposable income are already higher than in Japan and South Korea. But savings remain very high still. It will fall with improving social safety nets and better health and education services. Signs of structural change are evolving towards an economy that is less unbalanced.
Indeed, towards one that is more consumer driven. Good policies will accelerate this shift. It is also right that China’s key driver is innovation. This is what I see when I last visited the Pearl River delta (Guangzhou), Hangzhou and Xiamen. It is this combination of growing economic size and improving technology that’s transforming China into becoming a formidable economic power.
The US will continue to complain about this. In my view, it has no right to do so. Self-defence is a right of nations. So is its right to develop. The US can spread “fake news” about China’s theft of intellectual property. There is the right of catch-up – after all, that’s what the US did in the 19th century, seizing the ideas of others and building on them.
Intellectual property is not sacrosanct – innovation is. US can try to (and should) work to protect it. But the idea that US can prevent nations (including China) from innovating is ludicrous. In the end, managing the competition will remain a serious challenge, especially between two superpowers. It’s going to be difficult. It is also unclear how today’s conflicts over trade can be resolved.
True, Trump is unpredictable. As far as I can remember, he has been a protectionist all his life. But we also know co-operation over managing the global commons (like climate change) has collapsed. What’s clear is that China’s future is up to China. The relations of the West with China are up to it. Surely, this relationship can be managed. China’s economy is still growing, but it’s maturing.
One thing is certain – the West can and must learn to live with a rising China. It’s not a zero-sum game.
Former banker, Harvard educated economist and British Chartered Scientist, Tan Sri Lin See-Yan is the author of The Global Economy in Turbulent Times (Wiley, 2015) and Turbulence in Trying Times (Pearson, 2017). Feedback is most welcome.