ACHIEVING THE CHINESE DREAM?

Gerard Lyons

Friday 27th October: As President Xi tightens the levers of power in China, Gerard Lyons* reflects on the other questions raised – for the west and the world.

 

What can we learn from the Chinese National People’s Congress (NPC) that has just finished in Beijing? Much of the reaction in the western press has been about President Xi’s hold on power. Although an aspect of the last few weeks it is not the only one.The Chinese Communist Party continues to follow a lesson learned long ago from the former Soviet Union: the sequencing of reform is key. Economic reform, which President Xi spelled out as central to future progress, cannot go hand in hand with political reform. As China moves through its next stage of opening up, economic success is not only needed to achieve what has become known as the ‘China dream’ but to retain the political status quo too.China’s economic record is impressive. In the last five years the economy has increased in size from 54 to 80 trillion RMB ($8.2 trillion to $12.1 trillion), and an additional 60 million people were taken out of poverty.Yet, there are challenges. Debt levels are high and institutional change needs to keep up with economic growth. China is still run from the centre, in much the same way as it was when the economy was far smaller.

Xi made clear he wants to achieve economic success and see more people share in it, build a powerful military, and see China achieve greater global leadership. At the same time, an underlying message was that Western style democracy is not for China. Could China instead, as Xi wants, through what is effectively state capitalism, provide a template for the role of the state in the economy for the rest of the world to follow?

Continued long-term planning was highlighted by the new found importance attached to 2035. Previously, China has set out to achieve vital milestones by 2021 (the centenary of the founding of the Chinese Communist Party) and 2049 (the hundredth birthday of the country). At this NPC, a two stage process to 2049 was set out with 2035 marking the end of the first phase.

This first phase has to see a greater role for the private sector in order to achieve the growth needed.

The second phase, though, may yet see the Government establish more firmly its role in achieving socialism with Chinese characteristics. Thus this NPC effectively was a strategy not just for the next five years of China’s development but for a new era in coming decades.

Vital for near term plans is the commitment to further economic and financial reform. While the rest of the world sees China as the globe’s second largest economy and an economic power, at home the realisation is that income per head is still low. China needs inclusive growth to restrain its social tensions, highlighted by the President’s focus on inequality, pollution and access to health, education and housing. During his mammoth opening speech, the loudest applause was when the President said housing was for living in, not for speculation.

The aim is for “moderate prosperity” by the end of this first phase, continuing with regional and rural reform. The importance attached to agriculture and to inland areas should not be overlooked. That too reflects work in progress, as does his aim for strong state-owned enterprises.

China also needs to move up the value curve, and is committed to advanced manufacturing. At home that means technological innovation and more investment in basic research. It also points to China needing to buy overseas assets, technology and intellectual property. ‘Bought by China’ will be three words to dominate this age if it is to deliver on its aims.

There will also be opportunities for higher investment into China too.

The commitment to continued financial market reform, with market driven exchange and interest rates, is necessary. Deeper and broader capital markets are essential, not least to help direct savings into areas of necessary investment.

This will take time. It will also allow China to overcome the middle income trap, where countries find it hard to move from being a low to a higher-income economy.

While the economic trend will be up, there will be a challenge: as the economy changes and the market mechanism takes hold, it would not be surprising to see greater future economic volatility along the way.

One interesting aspect was the talk of “macro regulation”, covering all types of economic policy. These clearly need to be aligned if China is to achieve such economic success and address overseas concerns about imbalanced growth and rising debt. This sort of approach may prove a valuable lesson from China to elsewhere, as consistency across policy areas is essential.

China’s global aims were clear. One consequence is the growing importance of the Belt Road initiative. This has always been close to Xi’s heart and seeks to build China’s economic and geopolitical influence, as well as help the domestic economy. It is likely to prove to be the world’s biggest infrastructure project over the next decade, covering multiple countries. There are grounds for optimism about the economic impact of the Belt Road, both for China and regionally, and it will reinforce China’s global importance too.

It ties in with the pro-globalisation message President Xi gave in Davos in January, with talk of a global community of common destiny. This includes a pro-environmental agenda, again continuing an existing message and a welcome one at that.

Where then might be the tension?

Reform will also have to offer foreign firms a more open investment climate. This new era of socialism with Chinese characteristics, we were told, will include law based governance and a new national supervision law. For international investors, the rule of law is key. Thus there is a question of whether success can be achieved economically, with the protection of the rule of law, and the basic freedoms needed for individuals and businesses to flourish. This, too, was an important lesson to heed from the old Soviet system.

Economic and political might also brings us onto military clout. Military modernisation was a message. This went alongside the message of no desire for expansion or hegemony. For China’s neighbours and the US it will be a case of watching what China does, as well as listening to what is said, given ongoing tensions in the South and East China Seas and the trouble spot of North Korea.

All this, of course, occurs ahead of President Trump’s forthcoming visit to meet President Xi. China senses it has an opportunity to play a leading role on the global stage. A clear vision from President Xi and this NPC and continued economic reform will make that possible.

 

*Dr Gerard Lyons is at Netwealth Investments, having previously served as chief economic advisor to Boris Johnson while he was mayor of London. He is a UK economist specialising in global financial markets, economic and regulatory policy with a focus on international banking. He is author, with Liam Halligan, of Clean Brexit.