China’s new leaders to focus on steady and long-term growth

The ascension of Xi Jinping and Li Keqiang as China’s president and premier, respectively, will likely lead to continuation of the economic policies of their predecessors. These policies focus on reducing income gaps, promoting rural development, economic reform, and attempts to draw foreigners to invest in China’s high-tech industry and to encourage Chinese businesses to invest overseas.

The National People’s Congress (NPC) session that started on March 5 was a key political, economic and social event at which Xi and Li were confirmed in their new roles, which they are likely to hold for two terms, or 10 years.

It also featured the announcement of the country’s economic direction and targets for both the short and long terms, which will have implications on the global level due to the increasingly influential role of the Chinese economy in the world.

Kasikorn Research Center predicts that the new leadership of China will continue to adhere to the country’s five-year economic and social development plan that started in 2011, aiming for steady growth of the economy in the long term.

In the 12th economic development plan, the focuses are on reducing income gaps and spreading the prosperity seen from urban growth to rural areas, which correlate with plans of China’s local governments in the rural provinces such as Guizhou and Shanxi to aim for gross domestic product growth as high as 9.9%.

In contrast, China’s other local administrations, especially those of the developed areas, have lowered their economic targets in order to focus more on the quality of development and distribution of wealth. They have also cut borrowing to reduce risks to the country’s finance.

China’s central government is promoting an income distribution plan that aims to raise minimum wages in urban areas by 40% by 2015 and to double per capita income by 2020. This will be achieved via a number of measures, including more spending on education, health insurance and public housing, as well as having state enterprises pay more dividends to fund social development programmes.

Under this economic development plan, China will try to achieve steady economic growth by way of several approaches. Three major pillars involve reforming the economic structure, drawing more foreigners to invest in high-tech industry, and encouraging Chinese businesses to invest overseas, as follows:

Reforming the economic structure:

• Reduce reliance on exports and mass production;

• Promote domestic consumption, investment in high-tech industry and the service sector.

Drawing foreigners to invest in high-tech industry:

• Revise regulations and tax structure, while creating pricing mechanisms that favour competition in the business sector;

• Encourage technology transfer and restructure the industrial sector to increase efficient use of resources and reduce pollution.

Encouraging Chinese businesses to invest overseas:

• Provide funding to businesses for overseas investment

• Develop economic cooperation, especially the RCEP (Regional Comprehensive Economic Partnership) with countries including the 10 Asean nations that are already major trade and investment partners.

These policies will promote more balanced development in terms of both economic growth and quality of life, which will, in turn, create stability and long-term growth for China.

In order to reach its growth and reform targets, the Chinese government is expected to devise various measures that support its policies, with a focus on gradual recovery from the economic slowdown in 2012. It will try to do so by investing in infrastructure projects and local industrial development, while closely controlling the real estate sector and inflation.

China will continue to invest in highways, high-speed trains, seaports and airports as well as local product distribution hubs and research and development centres in sectors supported by the economic development plan, such as biotechnology and renewable energy.

At the same time, it will tighten controls on real estate prices by raising taxes, mortgage interest rates, and down payments to curb rising prices as well as inflation.

As a result of these measures, Kasikorn Research Center predicts that the Chinese economy in 2013 will expand by 8.1%, higher than the growth of 7.8% in 2012, which was the lowest recorded in the last 13 years.

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Writer: Kasikorn Research Center