China’s Economic Outlook

What did the third plenary session of the 18th Central Committee tell us about China’s future?

By Louisa Wah Hansen

“While the world has been—and still is—suffering from the aftermath of Global Financial Crisis, China has switched from being the biggest factory to one of the biggest consumer markets of the world. This in itself is an extraordinary feat,” said Prof. Liu Mingkang, honorary professor of The Chinese University of Hong Kong (CUHK) Business School and former chairman of the China Banking and Regulatory Commission.

Professor Lau was speaking at the inaugural lecture to kick off the “Lau Chor Tak Distinguished Lecture on Global Economics and Finance”, organized by the Institute of Global Economic and Finance (IGEF) at CUHK. He analyzed in great detail the results of the Third Plenary Session — held every five years to determine the future economic direction of China, and shared his concrete views on numerous aspects of the Chinese economy going forward.

“The Third Plenary Session clearly inspires motivation for further growth,” he continued. “But how well will the direction set at the session be executed? I feel both cautious and optimistic at the same time,” he said.

Reasons for Optimism

Prof. Liu was optimistic about China’s future economy based on the reasons below:

Clear vision and goals: The Chinese Government has made it a goal to modernize the governance of the nation.

New market roles: A top-to-bottom execution of market mechanism will allow the market to distribute resources freely. Standards will be set up and the government has to abide by them. “The visible and invisible hands need to complement each other. Those who dance on the market platform are privately owned enterprises and they need to be given more freedom,” he said.

Rule of law and legal services: The Constitution and the law are supreme. No organization or individual should be exempt from them.

Competition policy and law: Competition in the market should be open and fair. Predictability is very important for the market. A good competitive environment can be achieved through competition law and coordination of enforcement across the board. Standards, certification and conformity assessment in food, fuel, cloud computing, industrial products and services will be established for the first time:

Property rights protection: Intellectual property rights has been an area that has worried most businesses throughout the years, and even high-level, large companies are not immune. To address this issue, the following issues are on the government’s agenda:

Intellectual property that belongs to private enterprises should be equally protected as intellectual property belonging to public/government organizations;
Intellectual property rights should form the base of the innovation ecosystem;
Enforcement and supervision should be strengthened.

Rural land reform and household registration policy (i.e., change in “hukou”): Land in rural areas and townships to be traded freely in the market. This would make it possible for small businesses in the rural areas to borrow money using their real estates as collateral. Household registration policy in Tier-2 and Tier-3 cities will be reformed to free people up from the land.

New policy to accommodate demographic shifts: If each member of a married couple is the “only child” in their respective families, they will be allowed to give birth to two children.

Combating corruption with a new system: The extent of anti-corruption activity will be broadened.

New Frontiers

As a result of the above-mentioned reforms, Prof. Liu believes a number of positive changes will take place in China: “The pace of China’s globalization will be hastened; the increase in governance will lower the obstacles and costs of reform; and the rule of law and competition will unleash a strong sense of motivation for innovation and entrepreneurship.”

He emphasized that it would still be possible to realize the “Chinese Dream” even if the economy slows down to allow some room for adjusting the overcapacity in certain industries, such as ship-building, steel and petrochemicals. It is also important for economic growth to slow down to curb the problem of bad debts at the local government level. He said that if the growth rate is kept at 6.8-6.9 percent, China would still be able to double its GDP in 2020 from the figure in 2010. And if the growth rate stays at 7.1 percent, the per capital income would double in 2020 from that in 2010, from US$4,382 to US$8,782.

There are six areas where Prof. Liu finds huge potential for growth in the upcoming years:

• Clean energy and technology
• Clean water, food and beverage
• Urbanization design, construction and engineering
• Financial services and innovation
• Healthcare and insurance service
• Media and entertainment

He joked that just because he had mentioned these hot areas of economic development, it does not mean that everyone should rush to buy stocks in these sectors, to which the audience broke into unanimous laughter.

However, Prof. Liu remained cautious in his optimism.

First, in the context of a very uncertain and potentially stormy future in European and U.S. economies, he said China faces a double-edged sword as it continues its path of globalization. There are great opportunities for China to take advantage of, yet it needs access to reliable, global financial data and their proper interpretations. “We can’t rely on courage alone. We must have wisdom and experience,” he said. “It’s very important to have talents for that.”

Second, the issue of governance looms large, and there are no cut-and-dry, overnight solutions to turn it around. The question is: “Are we ready for modern governance?” He asked.

Third, the gap between the rich and the poor is causing a great imbalance in the economy, leading to problems such as serious inflation.

Fourth, the Internet is rapidly changing the way people live and work. He observed that the young generation tends to prefer working from home using the phone and the Internet. The traditional way of working together in a workplace is losing ground. “This is creating a huge wave of changes in society and how it is governed,” he said. “It is also posing serious challenges to traditional values and worldviews.”

Fifth, he cited the aging of the population as a major cause of concern as it creates pressure on the welfare system. While China’s population is expected to peak at 1.5 billion after which it should taper down, the urgency of the welfare issue cannot be denied.

Lastly, Prof. Liu named human resources as a big challenge—while many who have studied abroad have returned to China, the question is: Can companies keep them happy and make them stay?

Despite all these challenges, Prof. Liu maintained: “I believe we’ll make great strides in the next seven years.” The keys to the realization of the “Chinese Dream,” he said, are three-fold: escalate education reform and the development of talents; upgrade and reorganize the entire supply chain system; and grab the big opportunities out there and take risks.