UNLIKE the consultations last year, the 2019 annual sessions of the National People’s Congress (NPC) in early March (two sessions) was sobering in setting the tone for economic policies in 2019 and beyond.
The “two sessions” comprise first, the second session of the 13th Chinese People’s Political Consultative Conference National Committee (CPPCC, China’s top political advisory body), followed by the second session of the 13th NPC (the nation’s top legislature). They dealt with key issues concerning China’s development strategies & policies.
Work report (WR)
Consultations were centred on the Prime Minister’s WR which sets the general tone for economic policies for 2019, within China’s overarching commitment to “building a better future.” Decisions taken by the NPC included:
(i) policy objective: raise per capita income, eradicate absolute poverty and combat climate change;
(ii) China’s GDP growth target for 2019 was lowered to 6%-6.5% (6.6% actual in 2018), while its fiscal deficit was raised to not exceeding 3% of GDP. Growth is not to fall below 6.2% in each of the next two years to sustain its quest to double average income by 2020 (above the 2010 level), to become a “moderately well-off society;”
(iii) cut taxes by US$300mil to ease burden on small and medium-sized enterprises; also cut value-added tax to 13% on manufacturing as an efficient and inclusive way to stimulate the economy. Together with further monetary easing, this policy mix is expected to support the aim to create more than 11 million urban jobs, keeping urban unemployment at about 5.5%;
(iv) relax controls over market access for foreign firms (FFs) and shorten the negative list of sectors where FFs cannot operate. Also, measures to alleviate economic and trade tensions, especially with the US. To further open-up the economy with a network of special free trade zones, including in Shanghai and Hainan;
(v) issue 2.15 trillion yuan in special local government bonds (800 billion yuan in 2018) to help finance 1 trillion yuan of extra infrastructure investments to help boost economic activity;
(vi) target consumer inflation growth at 3% for 2019;
(vii) focus on promulgating new foreign direct investment legislation and safeguarding intellectual property rights; and
(viii) promote continuing supply-side structural reforms to achieve greater policy focus in reducing industrial overcapacity, stock of unsold homes, borrowing costs and to deleverage the corporate sector. In 2019, Chinese sovereign commercial debt rose to US$2.4 trillion, against US$16.5 trillion in the US and US$10 trillion in Japan. Further, Chinese stock market capitalisation, as reflected in CAPE (cyclically adjusted price-to-earnings ratio) was 15 in 2018, compared with 31 in the US (twice its historical average and same as during 1929 crash).
Overall, the economy will now confidently shift from high-speed to high-quality growth. It will still grow quickly compared with other major economies, but is now more consumption-driven and technological and service oriented. To augment NPC’s work, CPPCC’s major tasks included:
(a) implementing the national Thought on Socialism with Chinese Characteristics for the New Era;
(b) offering high quality recommendations to complete building a moderately prosperous society;
(c) engaging in issues of public concern, including creating new jobs, boosting a sharing economy, training school teachers, improving medical care for the poor, resolving climate change issues; and developing better elderly care services.
China’s reform continues to deepen. By 2035, China is expected to achieve socialist modernisation, with its per capita GDP reaching 35,000 international dollars in terms of purchasing power parity (PPP). While the US reached that level in 1988, Germany, France, the UK and Japan did so in 1998, 2001, 2003 and 2004, respectively.
To realise this goal, China has to solve several significant long-term problems. First, to maintain high total factor productivity (TFP), which at present is only 43% that of the US; whereas when the main advanced nations achieved economic modernisation, their TFP was about 78% that of the US. To raise its TFP, China will need to expedite systemic reforms to enable the markets to play a leading role in factor distribution, and give full play to factor efficiency.
Second, to achieve socialist modernisation by 2035, the proportion of the primary, secondary and tertiary industries in GDP should be roughly 3%, 32% and 65%, respectively, just like it was for the advanced economies when their per capita GDP reached 35,000 international dollars in PPP terms. Which means China will need to innovate and focus on developing the high-end service industry.
Also, to maintain a high ratio of manufacturing to GDP, especially those related to key technologies. To achieve this, labour force distribution must adjust. Global experience suggests employment population will fall in the primary industry and rise in tertiary. So, more than 20% of its labour force has to shift from agriculture to the secondary and tertiary sectors. Such a large-scale redistribution of workers could create serious new problems.
Third, the number of people aged 65 or above in China is likely to account for 23% of the total population in 2035. In comparison, when Japan’s per capita GDP reached 35,000 international dollars in 2004, only 14.15% was aged 65 or above. This means China faces a serious aging problem. Today, China’s median age is about 37 years – similar to that in the US – but by 2035, it will be 46 years. So, China’s elderly will pose a huge challenge.
Fourth, China’s urbanisation level is about 60%, and is estimated to rise to 75% (even to 80% by 2035) which will create more challenges for the household registration system, public services and public fiscal expenditure. Further, China’s investment in basic research accounts for only 5.5% of the overall R&D investment. China’s development requires huge investment in basic technologies. Moreover, household consumption should reach 58% of GDP by 2035, as against 38%-39% at present.
To ensure it rises by 20% age points, people’s incomes will need to improve, the income gap narrowed, rising housing prices curbed, and more, high-quality products and services to be provided. The best way is to further deepen reforms and opening-up, to enable markets to play a key role in resource distribution.
China’s new foreign investment law will change the operating environment in the domestic economy:
(i) FFs will now receive greater IP protection;
(ii) forced technology transfers will be forbidden;
(iii) negative list for FFs will be reduced; and
(iv) FFs will receive “national treatment” – to be treated the same as Chinese firms. This sets a milestone in creating fair and equal treatment in China. It reflects China’s determination and confidence in opening wider to the outside world. More important, FDIs are now assured that the rule-of-law exists. Judicial reform will improve legal services, better able to resolve disputes, and act as a guarantee for consolidating foundations and stabilising expectations to bring long-term benefits.
Still, there remains concerns as to how the law will be implemented and enforced in practice. As I see it, the new law will not significantly change the challenges FFs face, as Chinese companies get more and more competitive. Still, without doubt, the new law will make China more attractive to FDIs.
China’s thrust into innovation is reaping dividends. Innovation underlies the constant industrial upgrade and technological breakthroughs which ensures China will attain its national goal of high-quality growth.
Four Great Modern Inventions were highlighted: high-speed railways; mobile phone-based electronic payments; e-commerce or online shopping; and bicycle-sharing apps. They show how innovation, in the form of tech-enabled convenience and efficiency, makes life easier in contemporary China. It is fast becoming China’s best-known exports too, promising to enhance the quality of lives worldwide:
> China’s bullet train has a market presence from Indonesia to Hungary. Today, its high-speed trains footprint covers more than 100 economies, including Malaysia, Russia and Brazil. The latest Fuxing bullet trains can run safely at 350 km per hour. By the end of 2018, China’s high-speed railway network had reached 29,000 km, accounting for nearly two-thirds of the world’s total.
> Digital payments are old hat in China. But now, China-originating e-payment tools (such as Alipay and WeChat Pay) are becoming increasingly common in many overseas tourist havens, as more and more tourism-related players adopt them. Tencent’s WeChat Pay is accepted in 49 economies worldwide. Its local smart solutions and service providers help establish a deeper presence outside China.
Alipay’s approach is to extend its own technologies and experience to incubate local payment solutions and allow for settlement using local currencies, as reflected in India’s Paytm app and the Alipay HK app. It also operates in Bangladesh and Pakistan, offering technology to serve the unbanked and under-banked, including cross-border remittances using block chain technology.
> Cross-border e-commerce is marked by two themes unfolding at the same time: Chinese people’s growing appetite for high-quality products and rising popularity of imported commodities. Changing Chinese consumer behaviour has led to a cross-border e-commerce boom. Second, foreign buyers are looking to purchase more from China as cross-border e-commerce platforms mature and logistics advance.
> After years of rapid growth, China-made brightly coloured bicycle-sharing business is shifting focus to improving their functionality and customer experiences. The likes of Ofo and Mobike have even expanded to major European and Asian metropolitan areas. This sharing economy generated more than 2.94 trillion yuan in transaction volume in 2018, up 41.6% year-on-year. It has since entered a new state where quality matters more than the speed at which it expands.
China has lifted 800 million (70% of total poor) out of poverty over 40 years. It did so more quickly than has ever been done; because of:
(i) concerted efforts at economic modernisation;
(ii) determination to eradicate extreme poverty by 2020, through building a unified commitment to shared goals;
(iii) use of best global practices, with learning-by-doing; and
(iv) mass job creation, especially in urban areas.
These were strengthened by emphasis on environmental sustainability and focused on those at the bottom of the income distribution chain.
What then are we to do
What had happened to China over the past 40 years is unique; it won’t, and can’t, be repeated. Things have since drastically changed. China’s new strategies and policies beyond 2020 reflect the realities of rising political change and uncertainties, growing technological disruption, and climate change.
In particular, there is the hardline US policy towards China. Sure, they have differences in history, culture, social systems and differing development stages. But these need not bring about antagonism or confrontation.
As I see it, cooperation based on mutual respect and mutual benefit is the best choice to allay global concerns. Overall, China and the US will need to align their interests, strengthen mutual trust, and make genuine adjustments to accommodate in making a good deal. Already, both sides have made substantive progress on many issues of common concern. Of late, they have stepped up consultations in a positive manner and hopefully, can soon reach a mutually beneficial, win-win deal.
Taken together, the narrowing US trade deficit in February 2019 and China’s stronger than expected 6.4% GDP growth in first quarter 2019 are reassuring signs that the world’s two largest economies can both do better in rebalancing their books, after a rough patch in late 2018. It’s just 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.