x Abu Dhabi, UAESaturday 22 July 2017

China's new set of goals

After relying on the same growth model for 30 years, the world's second most powerful economy has a new set of goals that will bring challenges more in tune with today.

After relying on the same growth model for 30 years, the world's second most powerful economy has a new set of goals that will bring challenges more in tune with today

The recent meeting of the central committee of China's communist party seems to have gone very much as planned. As observers predicted, the vice president Xi Jinping was named vice chairman of the powerful central military commission, taking him a step closer to the party chairmanship in 2012 and the presidency the following year.

Meanwhile, an end-of-session communique, reported by the official Xinhua news agency, gave pointers about the 2011-2015 development plan the four-day meeting approved.

According to the communique, the country should improve living standards, develop public services that cover urban and rural residents equally, have "harmonious labour relations" and "reasonably adjust income distribution". Unsurprisingly, there was no mention of political reform, despite recent calls for greater freedom of speech from Wen Jiabao, the premier.

While the gathering of the 200-plus strong central committee appeared from the outside to go smoothly, achieving the ambitious economic goals it set out will, experts say, involve navigating a much rockier path.

In particular, making modern China more equitable - the key to transforming the economy to one driven by domestic consumption, rather than exports - will be a challenge, says Dr Frank Song, a professor in the School of Economics and Finance at the University of Hong Kong.

Echoing the views of many, he says the growth model China has relied upon in the past three decades - low labour costs, high environmental costs and heavy use of certain resources - "has to be changed".

The key is reducing the dominance of state-owned enterprises, which he describes as a major source of inequality. With the high wages they pay to a fraction of the population, they distort income distribution in addition, as Dr Song puts it, to reinvesting "recklessly in more inefficient ways".

"In China you have a high savings ratio, and a lot of it comes from business saving. The monopolies contribute to this," he says.

Greater competition should be allowed in sectors ranging from transport to telecommunications, energy and education. Financing for small and medium-sized enterprises should be made easier through reform of the country's financial sector, says Dr Song.

"The model needs to be changed to make it more competitive, to allow more private capital to move in. That's another aspect of solving this income inequality."

Another key focus should be to rectify what Dr Song describes as the country's "false urbanisation". While more than 200 million Chinese have migrated to the country's metropolises, many "don't have the rights to access many resources in the cities".

In more difficult periods, such migrants are laid off and have to return to their home provinces. Their children have difficulty accessing education and many families are left without health cover and the costs of buying treatment are prohibitively high.

"The government has to … reform the growth model to have a more efficient urbanisation," Dr Song says.

Only when such inequalities are ironed out, he says, will the government be successful in transforming the economy into one driven by domestic consumption.

Even a refocus of the government's priorities may not be enough to achieve such structural change in the economy in the coming years, says Ren Xianfang, a China analyst at the economic and financial research company IHS Global Insight in Beijing.

China is "a long way from achieving" its goal of a domestic consumption-driven economy. This, Ms Ren says, has to be thought of as a more distant goal.

"This will most likely happen in the long term, after China's overall per capita GDP has hit a pretty advanced level,"she says.

"Only at that point will China really be able to have a more consumption-oriented growth model. At this stage, China still needs to accumulate capital."

Even if government policies are increasingly aimed at promoting domestic consumption, Ms Ren does not expect "any material progress" by 2015. "Given the development stage of the Chinese economy, it's still very difficult to achieve that."