From outside China, the Bo Xilai trial looks like the Chinese news event of the year, one of the preoccupations of Western media, along with corporate corruption and the clampdown on American and European companies. Yet these issues are no more than sideshows to the most important economic event of recent times; the unveiling and ratification of a major programme for reforms for the next decade. The reforms would bring another great leap forward in China’s dramatic ascent.
Chinese officials will reveal, this November, how long China will need to make the transition from an investment-led, middle-income country to an innovative, consumer-driven, high-income one and, thus, when it will become the world’s largest economy. The challenges that China’s new leadership faces in pushing for rising levels of innovation, entrepreneurship and skills will be the main discussion points at the New Champions Summit in Dalian, China, organized by the World Economic Forum. The Summit recognizes that China’s degree of success will determine global growth: it will determine whether the twenty-first century will be the Asian century, and whether by mid-century Asia will represent half or just a third.
On paper, the November plenum of the 18th party committee is just the latest in a sequence of party events that celebrate China’s new leadership. Yet it is the culmination of a carefully-planned process of deliberation on reforms. It started with the Central Work Conference last year, the second plenum in March, the National People’s Conference in June and, most recently, this summer’s brainstorming session at the seaside Beidaihe retreat. Historically, third plenums have turned out to be much more than run-of-the-mill events. At the third plenum of the 11th party committee in 1978, Deng Xiaoping launched the market reforms that set China on its industrial course to becoming the world’s second-largest economy. During the third plenum of the 14th committee in 1993, under Zhu Rongji, Chinese leadership ratified a ‘socialist market approach’ of combining markets and state decisions, which led to an unprecedented era of industrial growth.
Now with the third plenum focusing on China’s next challenge, the aim is to double average incomes by 2020, to achieve 70 per cent-plus urbanization by 2025 and to have the world’s largest supply of graduates. If it succeeds, China will quickly surpass America as the world’s largest economy. By 2025, it will probably move from middle-income status to high-income status and make around 1 billion of China’s 1.3 billion population ‘moderately prosperous’.
It is, of course, inevitable that as China moves from a focus on export-led growth, it will have to address structural issues, such as restrictions on labour mobility and private credit. In recent years, under the first wave of modernization, China’s progress to middle-income status has been astounding. In the first decade of the century, China became the world’s largest manufacturer. In 2009, China surpassed Germany as the world’s largest exporter. In 2010, it passed the US to become the world’s largest car producer.
For 35 years, China’s export-led growth has been spectacular, steering 500 million Chinese out of poverty. But as the World Bank ‘China 2030’ report acknowledged, productivity per worker and income per head are still far below America’s, so the second wave of modernization must break China out of that potential ‘middle-income trap.’ Typically, a country’s growth slows as soon as its income is among the top 30 in the world. This slowdown occurs because as a country’s income rises, it is no longer able to compete on low wages, and it is unable to compete on value-added because of low productivity. Indeed, the ‘China 2030’ report forecasts the loss of 80 million of China’s 130 million manufacturing jobs to lower-wage Asia and Africa.
Of course, China cannot rely on ‘one-off’ advantages such as the move from an agricultural to an industrial economy, comparatively low-cost labour, and the boost from membership in the WTO. With its urban population expected to expand by 300 million, China knows it will have to move quickly to exploit the ‘Third Industrial Revolution’ from 3D printing and digital design to nanotechnology, biotechnology and genetics, hence its one million research and development workers and its plans for 100 million more graduates. The new growth agenda will need that talent, but it will also need an obsessive focus on innovation, enterprise and social reform. The requirements are:
1. Liberalization of interest rates and the prices of producer goods and utilities;
2. A fairer competitive environment for private enterprises;
3. The opening up of the land ownership and household registration systems;
4. Local government fiscal reforms and the end of an overreliance on highly-volatile land sales through the creation of a solid local tax base;
5. The gradual internationalization of the yuan, most recently with free convertibility with the Australia dollar and the UK currency swap agreement.
Perhaps the most important barriers to long-term success are the disparities in wealth, now being addressed under the premier’s desire to ‘promote social equity.’ This is a prompting for tax reforms and plans for better health and welfare benefits. A phrase unfamiliar to the West!
Instead of struggling through the fallout from yet another failed G-20, heightened cooperation would raise growth, increase employment, raise living standards all round and address poverty ‘the rocket the post-crisis world now needs.