Xi's challenge to keep China growing
Euromoney, is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024
Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Sponsored Content

Xi's challenge to keep China growing

China’s incoming leadership must to do more to fix deep-seated structural problems hurting the economy. If they don’t face up to the challenge, the country’s future growth and social cohesion is at risk, says Louis Kuijs, Chief China Economist at RBS.

Louis Kuijs, Chief China Economist at RBS

Early signs suggest President Xi Jinping and China’s other new leaders, who officially assumed power at the National People’s Congress (NPC) in March, are open to reform. New leaders have already criticised official corruption and lavish spending within the Communist Party to assuage public anger. China watchers are now studying what is said at the NPC for signs of change in economic policy, or a new emphasis on tackling deep-rooted problems within Asia’s biggest economy.

The first such challenge is migration. Every year an estimated 13 million rural Chinese move to the city. More than half its 1.3 billion citizens are now urban dwellers.

A more managed approach to migration has helped China avoid the shanty towns that blight big urban centres in parts of Latin America, Asia and Africa. But its approach to urbanisation needs to change. By restricting newly-arrived migrants’ access to public services and affordable housing the government is constraining the economic potential of millions of would-be consumers and service-sector workers. That hurts China’s broader aim of rebalancing the economy towards more consumption and services and away from a reliance on investment and industry.

A major advance here would be a change in China’s controversial residency system – the hukou – to give newcomers better access to health, education, social security and affordable housing. At the same time, the government should overhaul the fiscal system 2013to give local administrations the means, and incentives, to fund public services and affordable housing for migrants.

At the other end of the migratory trail, rural land reform is needed to consolidate land holdings and improve agricultural mechanisation to raise rural residents’ incomes.

Rebalancing growth

Early signs suggest the government may be open to some reform. New Prime Minister Li Keqiang has commented on the need for change in this area on several occasions as part of a comprehensive rebalancing of growth patterns and to raise domestic consumption.

Elsewhere, meaningful structural reform will be more complicated.

Levelling the playing field between state-owned and private firms is a key challenge, yet past efforts have foundered on vested interests and a lack of political will. The government needs to significantly increase the dividend it charges state-owned enterprises and thus remove what is effectively a subsidy to their cost of capital. The extra revenue raised should go to the Ministry of Finance instead of being used for industrial policy.

More is required. Barriers to entry in parts of the service sector should be swept away. The line between ‘state’ and ‘market’ needs to be properly defined so, for example, regulators and the companies they regulate are sufficiently separated to avoid corruption corruption and inefficient state intervention.

Such politically-awkward reforms will require major commitment at the very top. China’s system of collective decision-making, consensual leadership – as well as vested interests – has so far checked progress. Yet attempting to sustain China’s still-impressive growth rate without tackling these fundamental issues will leave the country with unbalanced economic and social structures. The longer it takes to implement these reforms the harder they become.

Stop runaway lending

China’s challenge in the short-to-medium term must be to avoid a runaway expansion in lending and to put the property sector on a sound footing.

The government has been keen to rein in house prices since housing sales began to revive in mid-2012. However, price pressures remain and greater urbanisation, rising incomes and the skewed incentives of local government coupled with a lack of property taxation mean prices are likely to increase further. Rising social housing construction and the government’s recent call for greater enforcement of a 20 per cent capital gains tax on housing sales are welcome signs of a move towards addressing the fundamental problems on the housing market.

Perhaps most importantly, China must quickly address an explosion in shadow banking. Non-bank financing is now expanding so rapidly that overall leverage is rising at an unsustainable pace. It is a particular concern given that the non-bank entities tend to lend more to higher-risk firms and local government platforms. Regulation and supervision of the shadow banking sector must be stepped up if China is to avoid financial instability down the road. 

For more RBS Insight content, click here

Disclaimer

The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc (“RBS”) will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for investment advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisers make of the contents of this document. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed.

Where the document is connected to Over The Counter (“OTC”) financial instruments you should be aware that OTC derivatives (“OTC Derivatives”) can provide significant benefits but may also involve a variety of significant risks. All OTC Derivatives involve risks which include (inter-alia) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place to manage such risks. Therefore you should also determine whether the OTC transaction is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances.

RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein.

RBS is authorised and regulated in the UK by the Financial Services Authority, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the United States Securities Act of 1933, as amended. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC (www.sipc.org) member and subsidiary of The Royal Bank of Scotland Group plc. Dubai International Financial Centre: This material has been prepared by The Royal Bank of Scotland plc and is directed at “Professional Clients” as defined by the Dubai Financial Services Authority (DFSA). No other person should act upon it. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Professional Client”. This document has not been reviewed or approved by the DFSA. Qatar Financial Centre: This material has been prepared by The Royal Bank of Scotland N.V. and is directed solely at persons who are not “Retail Customer” as defined by the Qatar Financial Centre Regulatory Authority. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Business Customer” or “Market Counterparty”.

The Royal Bank of Scotland plc acts in certain jurisdictions as the authorised agent of The Royal Bank of Scotland N.V.

The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB.

..

Gift this article