The breakneck speed and sheer size of China’s economic development in the last four decades has attracted the world’s attention. Eight years after China became the second-largest global economy after years of double-digit annual GDP growth – around 10 percent on average, China now wants to draw attention to the quality of its economic growth.
The goal of a high-quality growth path is aimed at meeting the desire of Chinese people for a better life. The Communist Party of China (CPC) stated at its 19th National Congress in October 2017 that the gap between people’s growing demand for a better life and the problems of “unbalanced and inadequate development” is the “principal contradiction facing Chinese society” now.
Although in the last few years, annual GDP growth has been lower – around six to seven percent on average, Chinese policy makers and analysts regard this as acceptable. It is expected to remain so in the years to come. Meanwhile, livelihood indicators are high on the policy agenda, and this trend is expected to continue also.
Although a GDP growth rate goal was still set for 2018 in the work report delivered by Chinese Premier Li Keqiang at the annual meeting of the National People’s Congress (NPC) on March 4, the commitment of a “higher speed if possible in practice” which was stated in 2017’s report was not repeated. Instead, media and social media have picked up on the work report’s commitments to deliver better livelihoods.
Dividends of Spending
The goal of an approximate 6.5 percent GDP growth rate for 2018 is on par with the goal for 2017. Professor Li Peng with the Party School of the CPC Central Committee believes this goal is in tune with the potential of China’s economy and will help achieve China’s ambition of doubling its economy by 2020 over 2010. The real pace of growth in 2017 was 6.9 percent. Li attributed this to the better-than-expected recovery of other major economies, notably the US and the EU, which boosted China’s foreign trade.
However, “a trade war, if there is one, will affect China’s growth this year,” he added. The US administration has recently announced punitive tariffs on imports of steel and aluminum products, which do not only target China, but it has also imposed various trade remedy measures and launched a number of trade investigations against China, ranging from China-made washing machines to tech transfers.
Not repeating the commitment to seek a “higher speed [of growth] in practice” in the premier’s work report has been seen as a signal that Chinese policy makers are trying to shift market attention from the speed of growth to the quality.
Specific indicators of high-quality economic growth are subject to further research, but consumption is regarded by policy makers and analysts as one of the most important indicators and tools of achieving quality growth of around 6.5 percent in 2018.
Li Peng believes that brisk domestic consumption and progress on moving up the value chain will make up for the possible decline in foreign trade and underpin the 6.5 percent rate in 2018. Professor Li Daokui with Tsinghua University and a member of the Chinese People’s Political Consultative Conference (CPPCC), China’s top political advisory body, lists several attributes needed for high-quality growth. He told NewsChina that the economy has to be driven more by new hi-tech, services and consumption, than by investment. It is also important to solve long-term risks, particularly loans that have been granted to inefficient projects.
Among these, Li Daokui has high hopes for consumption. He estimated that household consumption already contributes 48 percent of China’s GDP, and would rise to 50 percent by 2020. An annual survey by China Central Television, the national broadcaster, found that Chinese consumers are most interested in spending on tourism and wellness products and services in 2018.
Apparently partly because of the importance of consumption, the CPC identified employment as the top priority for people’s livelihoods. Li Keqiang said that the 6.5 percent growth target would be good enough to realize the goal of fewer than 5.5 percent unemployment in urban areas in 2018. It is the first time residents who are primarily registered in other areas, for example migrant workers who live in a city but have their primary residence elsewhere, have been taken into account in the employment goal.
“As we have repeatedly stressed over the past few years, a growth rate which is either a bit higher or lower than the goal is acceptable, so long as the employment rate, people’s income and environment all improve,” noted Huang Shouhong, director of the Research Office of the State Council who led the drafting of the work report, at a press conference on March 5 in Beijing.
He Lifeng, chairman of the National Development and Reform Commission of China, estimated that 60 percent of China’s GDP would come from consumption in 2018. At the press conference during the annual session of the NPC on March 6 in Beijing, he said China’s middle-income group currently numbers around 400 million, and China would do more to further increase their income and help more impoverished people join the ranks of the middle income group.
More Money, More Choices
There is no doubt that Chinese consumers want to keep more money in their pockets to enjoy a better life. The pledge in the work report to “increase the minimum taxable income” for individual taxpayers received the most plaudits. The last increase came in 2011, exempting 60 million people from individual income tax that year, according to China’s Ministry of Finance. However, the annual average wages of urban employees was already higher than the minimum taxable income by 37 percent in 2016, according to salary samples taken by China’s National Bureau of Statistics (NBS), meaning many low income people have to pay income tax now. China’s average annual salary for the private sector is US$6,737, and for the public sector, it is US$10,674, according to NBS data.
Indeed, an even more important planned change than the higher minimum taxable income is the deduction of some major expenses from the income. These expenses would mainly include healthcare and children’s education costs, which, along with old-age provision, have long been described as “the three heavy mountains” for Chinese households. Professor Lu Xin with the Accounting Department of Jinan University in Guangzhou, proposed at the NPC’s annual session that taxes should be collected on the basis of households, rather than individuals, and the income gap between different areas should also be taken into account.
Liu Shangxi, director of the Chinese Academy of Fiscal Sciences and a member of the CPPCC, agreed that living costs must be considered in any new taxation system. However, he did not think a household-based system would be possible without clear information on members of every household and assets held by them. Otherwise, those with no or low salaries but who own valuable property may end up exempt from taxation, he told media during the annual CPPCC session in March. A property tax is also on the legislative agenda. Shi Yaobin, Chinese Deputy Finance Minister, disclosed at the press conference on March 7 during the annual NPC session that a property tax would be designed to be a source of local fiscal revenue and a tool of fair wealth distribution. Mainstream public opinion is that the tax should be imposed only on those with more than one or two properties, as additional properties are for investment, not residential purposes.
Chinese consumers not only need enough money to afford a better life, but also desire more choice of good products and services. Since 2016, the reform to facilitate production of better products and services for society has become the top priority of China’s economic policy. Excess capacity of low-quality coal and steel production will again be cut in 2018, after hundreds of millions tons of excess capacity was already cut in the past few years. New technologies and business models will continue to be encouraged. To promote entrepreneurship, the government has vowed further cuts of administrative red tape and corporate taxes in 2018.
Financial risks lurk in this process, often in deals in the guise of financial innovations. For example, fraud on online fund-raising platforms and duplicity in circumventing rules have already inflicted huge losses to investors and built up heavy local government debt. Reducing overcapacity in the steel and coal sectors faces the challenge of how to deal with zombie enterprises which, if shut down, would trigger a surge of bad bank loans. But if they are allowed to continue to survive on government-backed loans, it would drain more financial resources, leaving less capital and market to enterprises which have more chance to improve their products and services for consumers.
Li Daokui with Tsinghua University suggested that a bond market be further developed to address local government debt. In terms of corporate debts, he sees the danger of too many enterprises linked together on bad loans through their guarantees. Once one of them defaults, its guarantors, even if they are doing well, will have to use their own capital to cover this. Li Daokui urged a redefining of the limit of responsibilities that enterprises acting as guarantors have to take on in the case of default.
No matter what is available for Chinese consumers, the most important thing is how they feel about their life. “I am most concerned about how to redesign the assessment system of local governments which guides them to seek for quality, not speed of growth,” Li Daokui said. The system should not only include new objective indicators, such as the rise of per capita GDP and disposable income of local residents, but also their personal views about their gains from the economic growth.
For Chinese consumers, there is a lot to expect in 2018. The choices they make will be the best indicator of China’s growth.
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