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Still some walls to tear down
After two decades of powerful economic reforms in China, momentum has slowed in the past ten years. It's up to new leaders now to push further and harder, says Stephen S Roach.
In China, there is little debate these days over economic strategy. The Chinese have embraced the imperatives of a major rebalancing of their growth model - shifting away from the export-and investment-led strategy of the past 33 years and drawing increasing support from their 1. 3 billion consumers.
This plan was first identified by Prime Minister Wen Jiabao - whose successor will be announced at the 18th Communist Party Congress that opened Thursday - more than five and a half years ago when he famously pondered the pitfalls of a Chinese economy as increasingly "unstable, unbalanced, uncoordinated and (ultimately) unsustainable. " That led to enactment of the proconsumption 12th Five-Year Plan in March 2011.
Implementation of the plan has lagged. That task must now fall to China's new senior leaders who are to be anointed at the congress. China has talked the talk of structural rebalancing for nearly six years. Its new leaders must now walk the walk.
In deciphering the tea leaves from this congress, the key can be found in the script of Deng Xiaoping. At the so-called Third Plenum of the 11th Central Committee meeting of the Chinese Communist Party in late 1978, Deng grasped the urgency of China's post-Mao transitional imperatives and forged a dramatic new course with four simple words - "reform and opening up. " In the years to follow, that mantra was translated into action by an unparalleled 30-year development miracle.
A similar challenge awaits the 18th Party Congress and China's so-called Fifth Generation of leaders. The old model of export-led growth has taken China to a daunting transition point, but it is unlikely to carry it into the Promised Land.
Just as Deng found the answer to China's transitional imperatives in a powerful wave of reforms, the same opportunity awaits the next China. Three major reform initiatives are needed to transform the pro-consumption strategy of the 12th Five-Year Plan into reality. They provide a lens through which the results of the party congress can be judged.
First, China must provide a comprehensive set of regulations aimed at opening up its embryonic services sector. The second largest economy in the world cannot afford to have a services sector that is only 43 per cent of its gross domestic product - well below the percent shares in Asia's other major developing economies such as India, Korea and Taiwan, and far short of the 75 percent shares of advanced economies.
Services-led growth offers China many benefits. It provides the infrastructure for consumer demand - especially in neglected distribution industries such as wholesale and retail trade, domestic transportation and supply-chain logistics. Services require 35 per cent more jobs per unit of Chinese output than manufacturing and construction, allowing China to absorb surplus rural labor while growing more slowly. Services also consume fewer natural resources and energy, offering a more environmentally sustainable development trajectory.
Second, China must address the financial insecurity of its people that has arisen from a porous social-safety net. While considerable progress has been made in setting up national health-care and retirement systems, they suffer from a serious lack of funding, which limits their benefits. As a result, families increase their saving - a major headwind to consumer-led growth.
As the world's largest surplus saver - with total saving likely to amount to 50 per cent of gross domestic product in 2012 - China has the wherewithal to provide a significant injection of public funds into its retirement and health care systems. It also needs to reform its residential permit system to align benefit portability with rapid migration from the countryside to cities. And China needs to end "financial repression" by deregulating deposit interest rates, providing household savers with more attractive rates of return.
Third, China needs a new round of state-owned enterprise reforms. The first wave of SOE reforms in the late 1990s sparked improved efficiency in the Chinese economy. But there has been discernible backtracking on this front, especially in the aftermath of the crisis of 2008-09, when statedirected banks funneled a massive fiscal stimulus into investments by state-owned enterprises. This led to a renewed concentration of power in the state-controlled segment of the economy.
Prime Minister Wen has warned of the risks of this reversal, especially those posed by an increasingly concentrated banking system. New enterprise reforms are the only antidote. They must address dividend policy - which currently skews returns toward capital rather than labour (i. e. consumers). They must push for the public listing of remaining shares in state-owned enterprises. And they need to stress market-based innovation strategies that would level the playing field between state-supported and private sectors.
After two decades of powerful reforms, momentum has slowed in the past 10 years. The legacy of Deng Xiaoping faded in the rush to hypergrowth. Yet without reform and opening up, the Chinese miracle simply wouldn't have occurred. A similar push is vital if China is to move to the next stage in its remarkable development journey. The 18th Party Congress will reveal the full extent of China's commitment to its new strategy.
The writer teaches at Yale University and is a former chairman of Morgan Stanley Asia
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