The debate is over. After six years of weighing theoptions, China is now firmly committed to implementing a new growth strategy.At least, that’s the verdict I gleaned from the just-completed annual ChinaDevelopment Forum, long China’s most important dialogue with the outside world.
There were no surprises in the basic thrust of the strategy– a structural shift in China’s investment- and export-led growth model towarda more balanced consumer-based and services-led economy. The transformationreflects both necessity and design.
It is necessary because persistently weak global growth isunlikely to provide the solid external demand for Chinese exports that it oncedid. But it is also essential, because China’s new leadership seems determinedto come to grips witha vast array of internal imbalances that threaten the environment, promotedestabilizing income inequality, and exacerbate regional disparities.
The strategic shift is also a deliberate effort by Chinesepolicymakers to avoid the dreaded“middle-income trap” – a mid-stage slowdown that has ensnared most emerging economies when per capita incomenears the $17,000 threshold (in constant international prices). Developingeconomies that maintain their old growth models for too long fall into it, andChina probably will hit the threshold in 3-5 years.
Three insights from this year’s China Development Forumdeepened my confidence that a major structural transformation is now at hand thatwill enable China to avoid the middle-income trap. First, a well-articulatedurbanization strategy has emerged as a key pillar of consumer-led rebalancing.This was emphasized by China’s new senior leaders – Executive Vice PremierZhang Gaoli and Premier Li Keqiang – in the Forum’s opening and closingremarks, and considerable detail was provided in many of the working sessions.
Urbanization is a building block for consumption, becauseit provides powerful leverage to Chinese households’ purchasing power. Urbanworkers’ per capitaincome is more than three times higher than that of their counterparts in thecountryside.
The urban share of the Chinese population reached 52.6% in2012 – up nearly three-fold from 18% in 1980, and is expected to rise toward 70%by 2030. If ongoing urbanization can be coupled with job creation – a distinctpossibility in light of China’s emphasis on developing its embryoniclabor-intensive services sector – the outlook for household-income growth isquite encouraging.
The pace of urbanization should dispel Western doubts stemming fromconcerns over so-called ghost cities and chronic over-investment. According to research by McKinsey & Company, with the annual influxof new urban residents totaling 15-20 million, China will need more than 220large cities (at least one million people) by 2030, up from 125 in 2010.Moreover, because urbanization is a capital-intensive endeavor and China’scapital stock per worker – a key driver of productivity growth – is still only13% of the levels in the United States and Japan, China has good reason toremain a high-investment economy for years to come.
What is new today is the focus on urbanization’s negativeexternalities – especially the thorny issues of land confiscation and environmental degradation. A well-developed“eco-city” framework was presented at this year’s Forum to counter bothconcerns, and features incentives promoting a new urbanization model thatstresses compact land usage, mixed modes of local transportation, lighterbuilding materials, and non-carbon energy sources.
The second insight from the 2013 China Development Forum isthe new government’s focus on strengthening the social safety net as a pillarof a modern consumer society. In particular, owing to the hukou (China’santiquated household registration system), access to public services andbenefits is not portable. As a result, migrant workers – an underclassnumbering roughly 160 million – remain shut out of government-supported health care,education, and social security.
Holes in the social safety net have led to high and risinglevels of precautionary saving – driving a wedge between increases in laborincome and any impetus to discretionary purchasing power. Significantly, therewere strong hints from senior Chinese leaders at the Forum that hukou reform is nowunder active consideration.
While that would be welcome, such efforts need to be accompanied byan expansion of benefits. China’s retirement system has only about $430 billionof assets under management (national and local government social security andprivate-sector pensions). I pressed newly appointed Finance Minister Lou Jiweion this point, suggesting that China deploy some of its excess foreign-exchangereserves to fund such an effort – the same tactic used to provide a $200billion start-up injection for the China Investment Corporation, the sovereignwealth fund that he ran for the previous five and a half years. Unfortunately,he did not favor this suggestion.
The final – and possibly most important – insight that Itook away from the Forum concerned the quality of China’s new leaders. FromPresident Xi Jinping and Premier Li Keqiang on down, China’s new leadership team is quite sophisticatedin terms of analytics, risk assessment, scenario modeling, and devisinginnovative solutions to tough problems. Moreover, under the organizationalumbrella of the National Development and Reform Commission (NDRC) – thelatter-day version of the old central planning apparatus – China has marshaled considerableresources into the formulation of a comprehensive and well-thought-out economicstrategy.
But, in the end, it takes more than strong policy andanalytical skills to deal with tough economic challenges. We have seenunfortunate examples of that repeatedly in the West in recent years, and thereare no guarantees that China’s newly installed leaders will avoid comparablepitfalls.
Vision and strategy are vital for realizing the “ChinaDream,” as the country’s new leaders are now calling it. But it will takecourage and sheer determination to tackle what is perhaps the biggest obstacleof all – resistance from deeply entrenched local and provincial power blocs. Onthis critical front, strong words must be accompanied by bold action.