Here’s how China can fund its third plenum goal of high-quality development
There is a major disconnect between the on-the-ground realities in China and the wishes of external China-watchers looking for tangible evidence the authorities will support a more market-friendly growth strategy. This explains why China’s equity markets have underperformed global averages.
While tepid second-quarter economic results might raise concern among officials, strong exports and robust manufacturing are seen as good enough to realise this year’s growth target of around 5 per cent. Calls for an expansionary programme on the scale of what China carried out for the 2008 global financial crisis are unrealistic given the country’s weakened financial position after the Covid-19 pandemic and years of smaller stimulus efforts.
The distressed property market is the result of local authorities relying too heavily on property development to fund their spending obligations given inadequate budgetary revenues. Thus, the most urgent priority is comprehensive fiscal reform with the dual purpose of securing more revenue and aligning the spending responsibilities of central and local authorities with their available financing. References to fiscal reforms were part of the third plenum discussions, but their realisation remains uncertain.
A man reads a newspaper near a front-page photo of President Xi Jinping on an article about the conclusion of the third plenum, at a display board on a sidewalk in Beijing on July 19. Photo: AFP
For the foreign policy and academic community, many of the reforms highlighted in the third plenum discussions are seen as tinkering around the edges. They are institutional and regulatory refinements rather than sending a clear signal that market forces, not the state, will take the lead in guiding private sector activities, which was a point underscored in the 2013 third plenum.
But China’s goal of becoming more technologically self-sufficient is largely state-driven and reinforced by the increasing tensions with the United States. Pouring more resources into hi-tech activities could be risky since many endeavours might not succeed or, if they do, will only show results years later.
With both central and local government budgets under pressure and banks struggling to absorb the recent build-up in non-performing loans, the problem lies in finding enough money to fund these initiatives while also supporting more traditional social programmes to sustain growth in consumption. Thus, the challenge is implementing reforms that generate immediate increases in productivity and growth without weakening the government’s financial position.
The most obvious solution is abolishing China’s outdated hukou system, a vestige of the centrally planned economy that was designed to manage the movement of households by restricting their access to locally provided social services. Liberalising the hukou system used to be seen as an equity issue, but in the run-up to the third plenum, the economic implications have become just as important.
Workers clean dishes outside a restaurant in the Heiqiaocun migrant village in Beijing. China’s capital relies on migrant labour to keep its economy humming and people from across the country are drawn to the city by the promise of a better life, but high real estate prices and China’s restrictive hukou residence registration system have driven many into shanty towns on Beijing’s periphery. Photo: AFP
Migrant households have a higher savings rate than households with hukou given that they cannot access local services and buy property. Giving some 300 million migrants full residency rights would ratchet up consumption demand and stimulate GDP growth at little cost to local governments since their increased spending would buoy tax revenues and uplift the depressed property market.
Significant liberalisation of the hukou system has occurred in recent years, but only in small and medium-sized cities. Freeing up larger cities, especially megacities such as Beijing, Shanghai and Shenzhen, would not only spur consumption but also labour productivity. According to the World Bank’s Urban China report, larger cities tend to have higher labour productivity.
Rebalancing the regional allocation of public investment is also worth considering. Addressing regional disparities has been a high priority in alleviating poverty. This has led to an increase in investment relative to regional GDP for the far western provinces.
While progress has been made in terms of redistribution and poverty reduction, the returns on investment in these remote provinces are much lower than for the rest of the country. This has contributed to the steady decline in China’s GDP growth rate in the past decade. Some rebalancing of the regional allocation of public investment in favour of higher returns elsewhere would generate more rapid national growth at no additional cost to the budget.
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China posts 4.7% second-quarter growth, lower than expected
China posts 4.7% second-quarter growth, lower than expected
Similarly, rates of return on assets for state-owned and private firms were roughly similar in the years before the global financial crisis, but the gap has widened considerably in favour of private firms in the past decade and a half. A more disciplined reallocation allowing private firms to secure a larger share would lead to more rapid growth at no cost to the state.
These examples support the principle of allowing market forces to determine the best use of resources by allowing labour to seek better employment opportunities and spend in line with needs, and for capital to move to regions and activities with higher returns.
With China’s growth rate steadily trending downwards and the huge costs of promoting technological advancement and resuscitating the property market, Beijing needs to act on growth-enhancing reforms that will not add to its current financial difficulties.
Yukon Huang is a senior fellow with the Carnegie Endowment for International Peace
