China’s Pain Points

Treating an Achy Economy

Chinese Economy lede

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 shortagescorruption; rigged courts. Nobody knows all this better than China’s 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

Since rising to power in early 2013, China’s leaders have pushed ahead with dozens of reforms agreed to at a party gathering that November. The changes range from letting families have a second child to expanding farmers’ land rights, cracking down on bribe-taking 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. This October, those leaders are gathering for the fourth plenum of the Communist Party’s Central Committee to discuss judicial reforms aimed at making courts more independent and shoring up farmers’ land rights. Also up for discussion: making the country’s opaque budgeting process more transparent and requiring local governments to take more responsibility for their debt. China’s reform goals were left vague in 2013, allowing plenty of leeway for delays and results that fall short of expectations. The main specific was setting a plan to finish by 2020. Two overarching objectives are clear: ensuring the party’s right to govern, and transitioning from an economy reliant on exports and infrastructure investment to one fueled by domestic consumption and the guiding hand of the market. 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. On the other hand, the consequences for the world could be dire if China doesn’t manage to eliminate overcapacity, revive the property sector and focus more on the quality of economic growth than on hitting prescribed annual targets.

Source: National Bureau of Statistics of China
Source: National Bureau of Statistics of China

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 saw as a decade of inaction under President Hu Jintao and Premier Wen Jiabao. Expectations were high that President Xi Jinping and Premier Li Keqiang would follow through with reforms agreed to at last year’s third plenum. Since then, however, the country has seen little concrete progress toward promises to reform state-owned enterprises, control local-government debt and strengthen environmental protection. One reason may be that China’s growth is projected to be about 7 percent in 2015, the lowest in a generation.

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:

Nick Wadhams at nwadhams@bloomberg.net

Jonathan I. Landman at jlandman4@bloomberg.net