29/03/2013 | Stephen S. Roach | Project SyndicateThe debate is over. After six years of weighing the options,
China is now firmly committed to implementing a new growth strategy.At least, that’s the verdict I gleaned from the just-completed annual China Development 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 toward a more balanced consumer-based and
services-led economy. The transformation reflects both necessity and design.
It
is necessary because persistently weak global growth is unlikely to provide the
solid external demand for Chinese exports that it once did. But it is also
essential, because China’s new leadership seems determined to come to grips
with a vast array of internal imbalances that threaten the environment, promote
destabilizing income inequality, and exacerbate regional disparities.
The
strategic shift is also a deliberate effort by Chinese policymakers to avoid
the dreaded “middle-income trap” – a mid-stage slowdown that has ensnared most
emerging economies when per capita income nears the $17,000
threshold (in constant international prices). Developing economies that
maintain their old growth models for too long fall into it, and China probably
will hit the threshold in 3-5 years.
Three
insights from this year’s China Development Forum deepened my confidence that a
major structural transformation is now at hand that will enable China to avoid
the middle-income trap. First, a well-articulated urbanization strategy has
emerged as a key pillar of consumer-led rebalancing. This was emphasized by
China’s new senior leaders – Executive Vice Premier Zhang Gaoli and Premier Li
Keqiang – in the Forum’s opening and closing remarks, and considerable detail
was provided in many of the working sessions.
Urbanization
is a building block for consumption, because it provides powerful leverage to
Chinese households’ purchasing power. Urban workers’ per capita income
is more than three times higher than that of their counterparts in the
countryside.
The
urban share of the Chinese population reached 52.6% in 2012 – 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 distinct possibility
in light of China’s emphasis on developing its embryonic labor-intensive
services sector – the outlook for household-income growth is quite encouraging.
The
pace of urbanization should dispel Western doubts stemming from concerns over
so-called ghost cities and chronic over-investment. According to research by McKinsey & Company, with the annual influx of
new urban residents totaling 15-20 million, China will need more than 220 large
cities (at least one million people) by 2030, up from 125 in 2010. Moreover,
because urbanization is a capital-intensive endeavor and China’s capital stock
per worker – a key driver of productivity growth – is still only 13% of the
levels in the United States and Japan, China has good reason to remain a
high-investment economy for years to come.
What
is new today is the focus on urbanization’s negative externalities – 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 both concerns, and features incentives promoting a new urbanization
model that stresses compact land usage, mixed modes of local transportation,
lighter building materials, and non-carbon energy sources.
The
second insight from the 2013 China Development Forum is the new government’s
focus on strengthening the social safety net as a pillar of a modern consumer
society. In particular, owing to the hukou (China’s antiquated
household registration system), access to public services and benefits is not
portable. As a result, migrant workers – an underclass numbering 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 rising levels of precautionary
saving – driving a wedge between increases in labor income and any impetus to
discretionary purchasing power. Significantly, there were strong hints from
senior Chinese leaders at the Forum that hukou reform is now
under active consideration.
While that would
be welcome, such efforts need to be accompanied by an expansion of benefits.
China’s retirement system has only about $430 billion of assets under
management (national and local government social security and private-sector
pensions). I pressed newly appointed Finance Minister Lou Jiwei on this point,
suggesting that China deploy some of its excess foreign-exchange reserves to
fund such an effort – the same tactic used to provide a $200 billion start-up
injection for the China Investment Corporation, the sovereign wealth 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 I took away from the Forum
concerned the quality of China’s new leaders. From President Xi Jinping and
Premier Li Keqiang on down, China’s new leadership team is quite sophisticated
in terms of analytics, risk assessment, scenario modeling, and devising
innovative solutions to tough problems. Moreover, under the organizational
umbrella of the National Development and Reform Commission (NDRC) – the
latter-day version of the old central planning apparatus – China has marshaled
considerable resources into the formulation of a comprehensive and
well-thought-out economic strategy.
But,
in the end, it takes more than strong policy and analytical skills to deal with
tough economic challenges. We have seen unfortunate examples of that repeatedly
in the West in recent years, and there are no guarantees that China’s newly
installed leaders will avoid comparable pitfalls.
Vision
and strategy are vital for realizing the “China Dream,” as the country’s new
leaders are now calling it. But it will take courage and sheer determination to
tackle what is perhaps the biggest obstacle of all – resistance from deeply
entrenched local and provincial power blocs. On this critical front, strong words
must be accompanied by bold action.
Stephen S. Roach was Chairman of Morgan Stanley Asia and the firm's Chief Economist, and currently is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. His most recent book is The Next Asia.
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