Xis challenge is to drive consumption

Written by fe Bureau | New Delhi | Updated: Nov 15 2012, 09:23am hrs
The change in Chinese leadership and its implications for the global economy will be closely monitored by the rest of the world simply because China is expected to produce incremental growth of about 7% to 7.5% average on its $6-trillion GDP base at present. That will be more than the troubled economies of US and EU together will produce incrementally in the years ahead. That tells you of the continuing importance of China in aiding world growth.

The new President, Xi Jinping, will most likely continue on the reformist path like his predecessor Hu Jintao who, even while stepping down, has set a new economic target for China that of doubling GDP per capita growth for both rural and urban China from 2010 to 2020. So, Xi Jinping will pursue this target vigorously. To achieve this GDP per capita target by 2020, China will have to grow its GDP by at least 7.5% a year. There will be continuity in this respect as the Communist Party of China knows only too well that the world is in awe of that nation because it has shown stupendous growth over the past 20 years and lifted over 400 million people out of poverty. That, the party bosses well realise, has been their biggest currency of power.

Xi Jinping will therefore continue with new reforms to raise productivity. He may adopt a nuanced shift in strategy by seeking to drive a predominantly consumption-led growth over the next decade.

This strategy has been articulated well by many Chinese economists who say China essentially ran an investment-driven growth in the past twenty years. Consequently, Chinese GDP growth has been largely investment-driven and private consumption has contributed to less than 35% of the GDP. Xi Jinping will try to restore the balance and employ a strategy to make consumption driven growth predominant. Massive overcapacities created in infrastructure is another reason compelling China to move away from a largely investment led growth trajectory.

In a way, this strategy is already in place as economists aver that bringing the GDP growth projection down from 10% over the past decade to about 7.5% during 2010- 2020 actually means the economy is moving away from high investment-driven growth. Purely consumption-led growth will not get China a 10% GDP growth, say analysts. So, the ground has been laid to drive internal consumption. One big factor aiding this is the yuan is not substantially undervalued as it used to be until some years ago. A more fairly valued yuan will surely help in driving a growth strategy marked largely by internal consumption.

This will be Xi Jinping's main test.