CAMBRIDGE – The opaque nature of China’s government makes it difficult to see where Chinese economic policy is heading, and thus how the Chinese economy will develop in the years ahead. But the scale of China’s economy and its role in global trade and financial markets compel us to try to understand the intentions of China’s new leadership.
A useful starting point is to examine the key appointments that have been made since President Xi Jinping assumed office. One surprise was the decision to retain Zhou Xiaochuan as Governor of the People’s Bank of China (PBOC). Zhou had come to the end of his term – and had reached an age at which officials are supposed to retire. So the decision to keep him on for at least the next two years represents a significant endorsement by the new Chinese leadership.
Zhou is an intelligent and internationally respected expert on monetary policy and finance. As the head of the PBOC, he has favored more market-based monetary policies and increased internationalization of China’s currency, the renminbi. He has also worked successfully to contain inflationary pressures. We can expect more of the same in the coming years.
The new finance minister, Lou Jiwei, comes to the ministry from the China Investment Corporation, China’s sovereign wealth fund, where he dealt with global capital markets on a daily basis. Lou, a trained economist who previously served in the Ministry of Finance as a deputy minister, where he was a voice for pro-market reforms, indicated his current approach to tax and budget policy at a recent meeting in Beijing. He rejected what he described as the European style of very large government and high tax rates and the American style of lower tax rates but large fiscal deficits, in favor of low budget deficits and a tax system that would promote “opportunities” for individuals and private enterprises.
Xi and Premier Li Keqiang obviously knew what they were getting when they appointed Lou. And, despite his age, they promised that he would have a full five years as Finance Minister, which would push his tenure past the normal retirement age.
Liu He is perhaps the least visible of the key economic thinkers. Liu played an important role in shaping the recently adopted 12th Five-Year Plan, with its emphasis on urbanization and service-sector development as a means to increase personal incomes and the share of consumer spending in GDP. He has recently been promoted to the post of Deputy Director of the National Development and Reform Commission, the principal body that advises the State Council on economic-development strategy and macroeconomic policy.
Taken together, these appointments demonstrate the new Chinese leadership’s emphasis on pro-market reforms and a shift from heavy industry to greater reliance on consumption and services. That shift is likely to mean a slower rate of GDP growth than the annual rate of nearly 10% that China achieved during the last three decades. But a slowdown to 7% annual growth would still double China’s GDP over the next decade.
More consumption and less heavy industry will also reduce China’s demand for raw materials, dampening global commodity prices. Even more significant, shifting income from state-owned enterprises to middle-class workers and increasing consumer spending will reduce China’s enormous saving rate. Since a country’s current-account surplus is the difference between its national saving and its national investment, China’s current-account surplus is likely to continue to shrink in the coming years. That is consistent with the Five-Year Plan’s goal of basing GDP growth more on domestic demand and less on exports.
Since China’s external surplus is already down to less than 2% of GDP, a decline in domestic saving could result in China beginning to run a current-account deficit. In that case, China would no longer be a net buyer of foreign bonds and other assets. If China wanted to continue to invest in foreign businesses and natural resources, it would have to become a net seller of bonds from its portfolio.
The new leadership will, of course, face serious obstacles as it tries to shift policy in these market-friendly directions. China’s state-owned enterprises are powerful forces in the economy, with substantial political influence; they will resist the shift from heavy industry to services.
Likewise, the widespread and official recognition of corruption introduces a new source of uncertainty into national and local politics. But China’s new leaders have signaled where they want the economy to go and have emphasized their determination to reduce corruption. Most important, they have put talented people in charge of the process. The rest of the world should hope that they succeed.