As the 2012 annual conference of China’s top decision-making bodies draws to a close, I come away convinced that the long overdue economic restructuring process has finally started in a meaningful way.
Indeed, it would be understandable if one is sceptical about China’s economic transformation efforts. After all, shifting the economy towards domestic consumption was already the intention of the previous Five-Year Plan (2006 to 2011). Disappointingly by the end of the plan period, household consumption as a proportion of GDP fell sharply, households were saving more than before and income distribution continued to favour the State and enterprises. China’s economic planners were further from their goal than before. Even if their conviction is not called into question, there remain onerous challenges to surmount in order to successfully transform China’s economic structure. Take the income disparity issue as an example and one can easily appreciate the immensity of the task. The problem cuts across many dimensions within the economy – rural and urban, coastal versus inland, labour force versus state and enterprises, state-owned monopolies versus small and medium enterprises.
Yet, the policy makers’ recent actions have given me renewed optimism that things are different this time. The lowering of growth target for the first time in five years suggests that the previous “growth at all cost” model is being moderated, at least for the central government. Despite fragilities in the export and manufacturing sectors, China pressed ahead with minimum wage increases. Against the resistance of strong interest groups, we are now in the midst of the most credible property cooling cycle ever, with the government demonstrating steely determination to see residential prices fall further. The extent of social housing development is unprecedented. Indeed, even China’s inaction – adopting tighter fiscal policy even as economic growth moderates – signals a significant departure from past practices. Viewed from whichever angle, the government is breaking new ground and clearly moving in the right direction.
Whether China will ultimately be successful in transforming its economy remains a question and topic for another day. But the journey has already begun. For investors who recognise the potential in China’s economic restructuring story, now is the time to align themselves with the investment theme while this economic reform remains in its early days.
