China’s new leadership starts to change economic direction

Economic growth

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Ordos Mar13.pngToday sees the start of China’s annual National People’s Congress (NPC) in Beijing, when the new leadership of president Xi and premier Li will formally take office. Judging by their activity since November, when the appointments were confirmed, we may well see major changes in economic policy being announced.

The key is the move away from the focus on export-led development, which has proved a dead end, as the blog discussed last month. Instead, the target will be to improve the incomes and living standards of the 80% of China’s population who currently earn up to $10/day. This is a radical departure from current policies, which have focused on the 4% who earn over $20/day.

One example is the change taking place in the city of Ordos, in Inner Mongolia. It has been an empty city over the past 5 years, although built to house 1 million people. Now, however, it is being used to boost rural incomes as the picture shows:

• 500k farmers and herdsmen are now being moved into the city
• The aim is to increase their incomes from $400/year (Rmb 2500) to $1900/year

At the same time, the farmers are being allowed to keep their land, in the hope that less intensive cultivation will boost vegetation coverage from levels as low as 25%.

Further signs of the new policies include:

• Cooling China’s over-heated property market with a 20% capital gains tax on sales and by (a) ending easy credit (b) tightening mortgage rules (c) widening use of property taxes
• Reducing the role of exports, which contributed 30% of GDP growth between 2001-8
• Cutting GDP growth targets in 14 of China’s 31 provinces
• Reducing the pollution caused by the rapid expansion in car ownership and the growth of heavy industry – real-time data for 74 cities was published in January as a prelude to action
• Developing facilities for China’s 200m senior citizens for the first time

All of these are major tasks in themselves. Together they amount to a complete change in economic direction.

Nobody can be sure that the new leadership has the ability to drive through changes of this magnitude. But the clear sense of urgency with which they are approaching the task gives some grounds for hope.

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