My latest Syndicate piece deals with the Chinese economic policy.
Project Syndicate Chinas New Path
April 29, 2013
By MARTIN FELDSTEIN
CAMBRIDGE The opaque nature of Chinas government makes it difficult to
see where Chinese economic policy is heading, and thus how the Chinese
economy will develop in the years ahead. But the scale of Chinas economy
and its role in global trade and financial markets compel us to try to
understand the intentions of Chinas new leadership.
A useful starting point is to examine the key appointments that have been
made since President Xi Jinping assumed office. One surprise was the
decision to retain Zhou Xiaochuan as Governor of the Peoples Bank of China
(PBOC). Zhou had come to the end of his term and had reached an age at
which officials are supposed to retire. So the decision to keep him on for
at least the next two years represents a significant endorsement by the new
Chinese leadership.
Zhou is an intelligent and internationally respected expert on monetary
policy and finance. As the head of the PBOC, he has favored more
market-based monetary policies and increased internationalization of
Chinas currency, the renminbi. He has also worked successfully to contain
inflationary pressures. We can expect more of the same in the coming years.
The new finance minister, Lou Jiwei, comes to the ministry from the China
Investment Corporation, Chinas sovereign wealth fund, where he dealt with
global capital markets on a daily basis. Lou, a trained economist who
previously served in the Ministry of Finance as a deputy minister, where he
was a voice for pro-market reforms, indicated his current approach to tax
and budget policy at a recent meeting in Beijing. He rejected what he
described as the European style of very large government and high tax rates
and the American style of lower tax rates but large fiscal deficits, in
favor of low budget deficits and a tax system that would promote
opportunities for individuals and private enterprises.
Xi and Premier Li Keqiang obviously knew what they were getting when they
appointed Lou. And, despite his age, they promised that he would have a
full five years as Finance Minister, which would push his tenure past the
normal retirement age.
Liu He is perhaps the least visible of the key economic thinkers. Liu
played an important role in shaping the recently adopted 12th Five-Year
Plan, with its emphasis on urbanization and service-sector development as a
means to increase personal incomes and the share of consumer spending in
GDP. He has recently been promoted to the post of Deputy Director of the
National Development and Reform Commission, the principal body that advises
the State Council on economic-development strategy and macroeconomic
policy.
Taken together, these appointments demonstrate the new Chinese leaderships
emphasis on pro-market reforms and a shift from heavy industry to greater
reliance on consumption and services. That shift is likely to mean a slower
rate of GDP growth than the annual rate of nearly 10% that China achieved
during the last three decades. But a slowdown to 7% annual growth would
still double Chinas GDP over the next decade.
More consumption and less heavy industry will also reduce Chinas demand
for raw materials, dampening global commodity prices. Even more
significant, shifting income from state-owned
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enterprises to middle-class workers and increasing consumer spending will
reduce Chinas enormous saving rate. Since a countrys current-account
surplus is the difference between its national saving and its national
investment, Chinas current-account surplus is likely to continue to shrink
in the coming years. That is consistent with the Five-Year Plans goal of
basing GDP growth more on domestic demand and less on exports.
Since Chinas external surplus is already down to less than 2% of GDP, a
decline in domestic saving could result in China beginning to run a
current-account deficit. In that case, China would no longer be a net buyer
of foreign bonds and other assets. If China wanted to continue to invest in
foreign businesses and natural resources, it would have to become a net
seller of bonds from its portfolio.
The new leadership will, of course, face serious obstacles as it tries to
shift policy in these market- friendly directions. Chinas state-owned
enterprises are powerful forces in the economy, with substantial political
influence; they will resist the shift from heavy industry to services.
Likewise, the widespread and official recognition of corruption introduces
a new source of uncertainty into national and local politics. But Chinas
new leaders have signaled where they want the economy to go and have
emphasized their determination to reduce corruption. Most important, they
have put talented people in charge of the process. The rest of the world
should hope that they succeed.
Martin Feldstein, a professor of economics at Harvard, was formerly
Chairman of President Ronald Reagans Council of Economic Advisors and
President of the National Bureau for Economic Research.
Copyright: Project Syndicate, 2013. www.project-syndicate.org
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Received on Thu May 02 2013 - 10:17:34 EDT
