Is the Chinese growth machine losing its steam?

National emblem of the People's Republic of China

National emblem of the People’s Republic of China (Photo credit: Wikipedia)

Over the last two decades, China has experienced phenomenal growth. But there are recent signs that are showing the miracle economic machinery losing its steam.

Internally, China has to deal with increasingly worsening structural problems and an uncertain economic system. The market-distorting powers of state-owned enterprises (SOEs) dominating certain industries, corruption, widening wealth gaps between cities and individuals, and an aging workforce, are but a few major issues that the Xi’s government has to now grapple with while setting the country on track to achieve his five year plan.

Some analysts believe that Xi is unlikely to drive much policy changes and it will not be until the machinery experiences major friction that threatens to bring it to a grinding halt would Xi step into act. Xi’s team will face challenges tougher than any of his predecessors because entire country is now set on a growth path that is pulling not just the economical and social system in a few directions, but also the political landscape. While the rich-poor divide continues to widen and SOEs continue their unrealistic growth paths deriving momentum from subsidies, the Chinese government will have to face with an increasingly educated middle class who will demand more freedom/liberty and a voice in policy-making.

Xi’s leadership has to decisively step on the accelerator to ensure that his plan for the emerging issues on his political agenda is met. By 2020, all urban and rural per capital individual income has to be double over the 2010 levels. By 2015, SOEs have to surrender five more percentage points of profits to drive the improvement of the people’s livelihood.

As far as development is concerned, there is still much room to pursue growth, at least for the next 5 – 10 years. However, there will come a point where the declining portion of the curve will be reached. State governments for e.g., that are now selling land to bring in growth and development will eventually hit the roadblock because land still remains a scarce and limited resource. Once the land is sold, it is likely that the route of taxes will be taken to ensure continued income influx. After taxes are levied, they will have to then creatively think of how else they can continue to make their cities an attractive option for investors. And because of the initial growth spurt experienced by China, it will also reach this declining point quickly.

Where will China go from 2020? It all remains in the hands of the leader Xi and the leader after him. It’s going to be an exciting watch!


All Rights Reserved, 2013

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