Acceleration Of Reforms In China

Written by Dan Steinbock, Difference Group

After political consolidation, China is ready to begin a broader implementation of structural reforms. That is vital to double per capita income over the interval 2010-20.

After President Xi assumed office in fall 2012, Chinese leadership has steadily moved toward more comprehensive structural reforms. As evidenced by the recent Two Sessions in Beijing, these reforms are about to move to a new level.

In the coming years, the focus will move toward tougher, broader and deeper execution, which is vital for higher living standards in China.

13th Five-Year Plan policies

Adopted in March 2016, China’s medium-term plan (2016-20) reflects policies, growth priorities and guidelines, which are subject to short-term adjustment but guided by longer-term visions. Most importantly, China is moving from its old, low-cost growth drivers toward new industries fueled by innovation-driven development.

The new 5-year blueprint incorporates many recent technology-related initiatives, including Strategic Emerging Industries (SEI), Sci-Tech Innovation 2030, Internet Plus, and Made in China 2025. It is likely to elevate the role of advanced manufacturing, modern services and strategic emerging industries as a proportion of GDP.

In 2005, when I first lectured at the Chinese Academy of Social Sciences, experts of research and development (R&D) were very concerned about China’s low level of R&D per GDP (1.3%). In 2010, it still relied on imitation (1.6%) but today the figure (2.1%) is already higher than that of the UK, or Italy. By 2020, it will be at par with most advanced economies (2.5%); and close to that of the US (2.7%).

Additionally, the five-year plan features China’s accelerating efforts toward green development, including a tighter carbon intensity target than envisioned in the past Copenhagen pledge. In turn, one of the most sensitive initiatives will focus on the reform of state-owned enterprises (SOE), even at the cost of shutting down the failed “zombie enterprises."

Furthermore, the plan includes an effort to bridge uneven geographic evolution through regional development, particularly through the Yangtze River Economic Belt, and the new urbanization strategy of large city clusters. Finally, the plan seeks more inclusive growth, including more equitable access to basic public services, and the implementation of the renminbi internationalization.

From strong economy to higher living standards

In the past, the five-year plans focused on accelerating the growth and strengths of the Chinese economy. In 2010-15, the annual GDP growth rate was 7.8 percent; in 2016-20, it will be closer to 6.5 percent. That is very much in line with economic development worldwide. Historically, industrialization accelerates growth, while the transition to post-industrial society means deceleration of growth.

In the pre-Xi China, the focus was still on growth and Chinese economy. Now it is on living standards and Chinese people. The goal is to become a “moderately prosperous society" by 2020. The tough objective requires doubling GDP per capita from the 2010 level, while 55 million Chinese will be lifted from poverty.

Let’s put this goal in its context. In 2010, average living standards - as measured by inflation-adjusted GDP per capita - were about the same in China, Peru and Namibia, based on data by the International Monetary Fund (IMF). By 2020, per capita income will be by 2.3 times higher in China, as per capita income will double to $21,000. As living standards in Peru and Namibia will increase 1.5 times in the same period, they will fall over 25 percent behind China.

Coming after three decades of world-historical growth, China’s catch-up in living standards is world historical and likely to serve as a new model for other aspiring emerging and developing nations. In 2010, Chinese living standards were about 40 percent behind those in Iran, Brazil and Mexico; by 2020 Chinese living standards will catch up with these peers.

During the past decade, there has been much talk about structural reforms in the U.S., Western Europe and Japan. Yet, only China has implemented such reforms. With growth, strategic plans are nice but execution is everything.

This is adapted from a commentary published by China Daily 07 March 2016.