Chinese Economy lede

China’s Pain Points

Treating an Achy Economy

By | Updated March 3, 2014

Here are some of China’s economic pain points: banks with growing levels of bad loans and local governments drowning in debt; state-dominated oligopolies suffocating private business; bad investment in the wrong places. That’s just what hurts now. Here are some chronic headaches: an aging population; a widening wealth gap; a lack of innovation that could make it hard for China to improve the lives of its middle-income citizens the way it lifted hundreds of millions out of poverty; underfunded health and pension systems; environmental degradation; water shortages; corruption; rigged courts. Nobody knows all this better than China’s new leaders, who have issued a raft of policies to deal with the growth problems arising from the country’s economic maturation. The Chinese Communist Party has had successes in the past changing course at times of crisis, but it will be years before it becomes clear how far the present leaders are willing to go to fix their system.

The Situation

China’s leaders gather March 4 for the annual meeting of China’s legislature, the National People’s Congress, to discuss implementing dozens of reforms agreed to at a party gathering last November. The changes range from letting families have a second child to expanding farmers’ land rights and reducing state controls over interest rates. Altogether they constitute the biggest policy shifts since at least the 1990s. How fast the changes will come is another question. The goals are vague, leaving plenty of leeway for delays and results that fall short of expectations;  the main specific is setting a plan to finish by 2020. One overarching objective is clear: ensuring the party’s right to govern. Done right, China’s new leadership may be putting the economy on the path to surpassing the U.S. as the world’s largest and making its citizens wealthier. Done wrong, the consequences for the world could be dire.

The Background

China completed its once-a-decade transfer of power to a new generation of leaders at the 2013 National People’s Congress after what many see as a decade of inaction under President Hu Jintao and Premier Wen Jiabao. Expectations are high that President Xi Jinping and Premier Li Keqiang will follow through on reforms. A Third Plenary Session of the party’s new central committee, selected as part of that transition, agreed to the reforms Nov. 12. Third plenums after power handovers have a lot of historical weight. In 1978, a third plenum opened China to foreign investment, fueled exports and kicked off the country’s spectacular modernization. After the 1993 meeting, fiscal policies were overhauled, more than 40 million state workers lost their jobs and China set a course to enter the World Trade Organization eight years later. Now the legislature and China’s top leaders are drawing the roadmap toward achieving their goals. Key areas to watch include reforms to state-owned enterprises, the government’s management of local-government debt, environmental protection and deregulation of the financial industry, according to Barclays Capital analyst May Yan.

The Argument

There are many factions inside China’s one-party state, including vested interests with a stake in preserving the system. Some want reforms like exchange-rate and interest-rate liberalization and a breakup of state monopolies. Others prefer more state control. Big state-owned companies and the families of communist leaders want to maintain benefits they have built up over the years. (One example: China could benefit from a property tax but many officials demur; they don’t want to list their real-estate assets.) Local governments don’t obey the center because they have their own incentives to do what they think is best for their careers and their localities. There’s danger for the party in doing too much or too little, in alienating domestic allies on the one hand or provoking capital flight if the economy founders on the other. The added complication now is that the Internet, while controlled, has given voice to hundreds of millions of people, many of whom are clamoring for relief from pollution, corruption, injustice and inequality.

The Reference Shelf

(First published Nov. 12, 2013)

To contact the editors responsible for this QuickTake:

John Liu at jliu42@bloomberg.net

Jonathan I. Landman at jlandman4@bloomberg.net