Tuesday, 21 January 2014

Signs China's economy could be on the right track

According to recently released trading data, the Chinese economy flew to the moon in 2013 in more ways than one. If the government data is to be believed in totality, China could have overtaken the United States economy as the world’s largest trading country in terms of goods in 2013.

Nearly US$4.2 trillion in total trade pushed China past the American’s much lower figure. Washington will release its trade figures in February, but right now the United States sits on a US$3.5 trillion total for the first 11 months of 2013.

Alongside this news, December saw China become the third country to place a mechanical, unmanned 140 kg rover on the lunar surface in a “soft landing”as part of an impressive 13-day journey. The last country to complete this impressive feat was Russia 37 years ago while the Cold War was at its zenith. The Americans, of course, make up the final piece of the triad. The Chinese rover is presently conducting a three-month mission collecting geological data and detecting for natural resources.

Japan, India, and the European Space Agency have each managed to crash probes into the moon in the past, but actually landing a rover on the surface appears to be a mission befitting only an exclusive club of nations.

The next stop for China’s highly politicised space program will probably be a manned mission to the moon. China has thrown down the gauntlet for other competing space-nations in the Asia Pacific region, which could herald the spark of a new race for supremacy over the final frontier.

China is firmly in the drivers seat when it comes to races of this sort. Their economy still retains much of its legendary vitality despite hints of a growing bubble as deep structural flaws within its banking system still threaten to push it over a premature fiscal edge. But for the meantime, China will enjoy the benefits of a truly globally-enviable 7 percent or greater growth rate, with the potential for it to continue well into 2014 if everything goes to plan.

A surge in imports proved to be a causal factor in China’s climb past the US$4 trillion mark last year. Strong and encouraging reform plans announced by the Communist Party of China (CCP) at the end of 2013 aim to steer the country away from a manufacturing-based economy towards a service-based economy.

But the Chinese economy still has a long way to go to overtake the United States in services, a key area of economic power. For instance, the Americans registered US$1.07 trillion in their 2012 services trade total, compared with China’s US$471 billion for the same period.

Nevertheless, China’s exports were slower in 2013 than at any point in the past 13 years, yet they still managed to grasp a healthy 7.9 percent rise, translating to roughly US$2.2 trillion. According to government data, imports also rose 7.3 percent to US$1.95 trillion while their trade surplus experienced a 12.8 percent increase to finish at close to US$260 billion.

It doesn't really matter which way this sort of news is cut, China has clearly reached an important milestone in its trade development. Of course,some economists are still sceptical of the officially released trade data showing them out in front of the US total.

Chinese companies have been known to inflate export figures to bring more money into the country. For instance, Global Financial Integrity, a nonprofit organisation based in Washington D.C., showed more than US$400 billion of misinvoicing flowed into China from Hong Kong between 2006 and 2013. The first quarter of 2013 alone saw over US$54 billion entering China disguised as export invoicing, according to the report.

All of this hasn’t escaped the notice of Beijing’s economic planners. The Chinese government has expressed concern that illicit fiscal inflows may be hurting their economy by fueling currency and housing speculation. To fix this, their new reform package unveiled at the country’s Third Plenum - a planning meeting conducted by the Chinese Communist Party to set the next 5 year's goals - will aim to liberalise their economy, reduce government intervention, and tighten financial laws.

While financial liberalisation reforms are already well advanced, there is still a lot of work left to do to reform state-owned enterprises (SOEs) and restructure local government finances and borrowings. Movement towards using greater amounts of the renminbi in international trade and developing local currency capital markets are two examples of early successes. Plans to deregulate interest rates and ramp up cross-border banking transactions and convertibility are apparently on their way as well.

Following the release of more detailed information about this meeting however, there appears to be good reason to believe China can tackle many of their most pressing obstacles. Evolving the Chinese economy will help close the gap between the top 20% richest urban Chinese and the poorest 20%, which could prove to be a brewing cauldron of problems for Beijing.

Also expected to help close the social gap is a restructuring of those bulky SOEs. In the final draft of the Third Plenum, policymakers explained how increasing the dividends paid to the central government from these important pillars of China’s economy would lead to increased social spending. A huge amount of freed funds could then be channeled towards additional household consumption, which may result in more equitable social welfare.

And there's more. Along with a planned property tax (set for introduction over the long term) and a relaxing of the one-child policy, a dismantling of the key hokou system is reportedly in the works.

The hukou household registration system is central to the country’s statecraft, but has recently become more of an obstacle than a useful tool. It divides all Chinese citizens into two main categories at birth: agricultural (rural) or non-agricultural (urban) and grants access to a wide range of social services, such as education and healthcare, mainly for urban citizens.

Relaxing the system will allow millions of migrant workers to bring their children with them - children who previously remained with relatives as their parents searched for work - so they can receive an education in more advanced cities. The idea would be to make the hukou system mobile so that benefits could be retained wherever someone chooses to travel and giving farmers the option to sell their shares in rural collectively owned land.

Ultimately, China has a promising blueprint for a more competitive and meritocratic economy. If the past 12 month’s trade figures are anything to go by, China is keeping up its impressive momentum, although that is still not guaranteed for the years ahead.

The scale of the challenges facing Beijing over the foreseeable future must be daunting for central planners, but the ideas floated at the Third Plenum might just be imaginative enough to foster serious changes in the way China does things. China’s poorest stand to gain significantly if the plans reach fruition, - and so do foreign commercial investors - as domestic consumption is encouraged and new financial laws make it tougher to break the rules.

Only time will tell if the reform packages will be enough to keep everyone happy and stave off popular revolt. And only time will tell if those people pulling the Communist Party strings are entirely willing to throw their weight behind the reforms, rather than dragging their heels.

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