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The third plenary session of the 18th Central Committee of the Communist Party of China ended on Tuesday with mixed signals. The plenum was seen as being important as it gave Premier Xi Jinping his first opportunity to outline his vision of China’s future. Interest in the meeting was high as in the past the third plenum has stimulated major change in the country. Concrete policies are not evident at the end of the plenum, rather analysts are battling to interpret statements and pinpoint future policy direction. Tangible policies and plans will become clearer in the coming weeks, months and years
One of the major issues on onlookers’ minds is the future growth of the economy. Euromonitor International is currently forecasting an average annual real rate of growth of 6.8% between 2014 and 2020. Really though, the important thing is to understand the drivers of this growth. The much vaunted switch to a greater emphasis on consumption, at the expense of investment, matters more to business than whether growth comes in at 7% or 8%.
Source: Euromonitor International from national statistics/UN/ IMF
Note: Data are in constant 2012 prices, and from 2013 onwards are forecast.
Key for future consumption growth is the reform of the “Hukou” system, and land reform in the countryside, to enable private land ownership (at present rural land is classified as being under collective ownership, meaning that farmers cannot sell, lease or mortgage it). Both of these reforms would stimulate consumer spending and the plenum contained undertakings to tackle both – albeit vague pledges rather than specific tactics.
Also central to growth prospects is the role of the government in the economy. In a statement issued after the plenum, according to Chinese State media the committee said: “The core issue is to straighten out the relationship between government and the market, allowing the market to play a decisive role in allocating resources and improving the government’s role,”. All eyes will be on this particular issue as it is key for the future growth prospects of foreign investors in China. It could herald the dismantling of State Owned Enterprises (SOEs) or far more likely the opening up of sectors of the economy to further foreign investment and domestic private business. It marks a distinct departure from previous statements that the market should play a “basic” role. In the communiqué issued after the plenum the party also pledged to accelerate the construction of free trade zones into inland and border areas.
The leadership are clearly aware of the need to reform, a lot depends on vested interests in local governments and SOEs and detail will emerge in the coming weeks, months and years. Although the lack of transparency in the form of specific reforms emerging from the plenum is not a surprise, it does nothing to stem the debate between those who say that China is at risk of a hard landing, and those that avow that the future is bright.
At the risk of sitting on the fence, I would say that future growth can be strong if significant reforms are brought about – which seems promising when looking at the communiqué. Without reform, and with China’s challenges of skills shortages, a shrinking labour force, environmental problems and inequality, then the future could be fraught with danger – both for China and the world economy as a whole.