China’s central economic work conference takes on challenges
China's central economic work conference wrapped up on Wednesday, focusing on high-quality development with an aim to combat major financial risks, poverty, and pollution in the next three years. China will attempt to continue to grow while facing these challenges, all of which have been previously stated. This conference was watched closely, since it is the first after President Xi Jinping consolidated his power at the 19th party congress.
A truck transfers containers at Qingdao port in Qingdao, east China's Shandong Province, Aug. 8, 2016.[Photo: Xinhua]
China is moving from high growth to high quality growth. The work conference stressed the aim of providing a better life for the people through sustainable development, as well as the aim of producing goods that are not merely ‘Made in China’ but which are ‘Created in China.’
To accomplish this and other goals, the government will implement Xi Jinping Thought on Socialist Economy with Chinese Characteristics for a New Era. This ideology emphasizes innovative, coordinated, and shared development with a focus on people. Supply-side structural reform is a major focus under this thinking.
Challenge accepted: combating financial risks, poverty, and pollution
China must face “three tough battles” in the coming three years. The first and largest challenge is to prevent major financial risks, as the country continues to hold an excessive amount of debt. Since the outbreak of the global crisis in 2008, China became dependent on debt-fueled growth. Some of the funds stemmed from risky financial practices and assets, such as, for example, wealth management products that incorporated existing wealth management products within them. The interconnectivity between financial institutions and products rose through 2016, so that in 2017, the China Banking Regulatory Institution took it upon itself to impose a flurry of new financial regulations to reduce systemic risks. However, banks have been reluctant to accept the new regulations, and the risks have largely remained in place.
Analysts outside of China have taken notice of this. The IMF recently warned, in its Financial Sector Assessment Report, of China’s high levels of corporate debt and funding through the use of wealth management products, particularly for joint stock banks. The report also underscored the fact that there are growing risks outside of the Big Four state-owned banks.
Monetary and fiscal policy will help support the effort to reduce risks in the financial system while maintaining growth. Monetary policy is to remain prudent and neutral, while fiscal policy will continue to be proactive to help generate growth. A neutral monetary policy will help to reduce the excessive lending that characterized the period of debt-fueled growth, while a proactive fiscal policy will help to create demand in places where demand is lacking.
Poverty reduction has become more difficult in recent years, as the extreme poor are the most difficult to reach. However, China has been quite successful in combating poverty, lifting over 60 million people out of poverty in the past five years. At the end of 2016, there were 43.35 million Chinese people living below the poverty line. China’s government has gone further than most other governments in the world in attacking poverty head-on. A number of programs have been set up to connect poor villages to markets, provide assistance to the most needy, pair poor villages or institutions with wealthier counterparts, and even move residents in isolated areas to more urban areas in which jobs are better accessible. It appears highly likely that China will easily achieve the goal of eradicating poverty by 2020.
The aim of combating pollution presents a major hurdle, and has met with mixed success in recent years. China has been able to transform many traditional coal-fired plants to ultra-low emission plants, which has helped reduce air pollution. Elimination of excess capacity has also helped tamp down unnecessary pollution. However, the recent directive to reduce coal usage in northern China and replace it with natural gas has resulted in natural gas shortages across the north, forcing some factories to shut down as natural gas supplies are reserved for household use.
What to expect in 2018
China’s government follows the policies laid out in its work conferences, and there is no doubt that the country will continue to strive toward these goals. The most challenging directive, however, will be to reduce risks in the financial system while continuing to grow. The problem is that as growth slows, financial institutions and firms have become dependent on easy access to finance to carry out business. As risks are barred, joint-stock banks and some state owned enterprises in particular will suffer. Investors in risky financial products such as wealth management products may also feel the burn if their products are allowed to fail.
It seems likely that the aims of poverty and pollution reduction will have ongoing success. The program of poverty reduction is already highly successful, something that other countries should seek to emulate. Pollution reduction is more complicated. In order to make headway in this area, additional infrastructure to supply cleaner energy needs to be constructed. Improvements in energy efficiency will also help to secure a healthier environment.
(Sara Hsu, associate professor, the State University of New York at New Paltz)