Analysis: Growth challenge for new leaders

Xi Jinping, front, with fellow members of the Politburo Standing Committee. Picture: Getty
Xi Jinping, front, with fellow members of the Politburo Standing Committee. Picture: Getty
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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. This apparently seamless transition, however, is widely expected to usher in a complex and potentially difficult decade for China .

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 (£3,800) 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 economy, which had slowed in recent quarters, may already be on the mend. But the authorities remain only cautiously optimistic.

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 US and Europe are unlikely to provide much support to Chinese exports.

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.

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 co-ordination 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 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.

And the unjust allocation of resources, which has enriched so many politically well-connected individuals and families, has become more difficult to bear.

• Paola Subacchi is research director of international econo-mics, Chatham House, London.