The opaque nature of China’s government makes it difficult to see where Chinese economic policy is heading, and thus how the country’s economy will develop in the years ahead. However, 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 Chinese President Xi Jinping (習近平) assumed office.
One surprise was the decision to retain Zhou Xiaochuan (周小川) as governor of the People’s Bank of China. 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 leadership.
Zhou is an intelligent and internationally respected expert on monetary policy and finance. As the head of the national bank, 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.
Chinese Minister of Finance Lou Jiwei (樓繼偉) comes to the ministry from the China Investment Corp, 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 US 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 Chinese Premier Li Keqiang (李克強) 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 (劉鶴) 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 China’s 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 percent that China achieved during the last three decades. However, a slowdown to 7 percent 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 savings rate.