Sustaining High Growth

New leaders have vision and strategy, but also need courage and determination to tackle entrenched resistance to change

Apr. 3 - After six years of weighing the options, China is now firmly committed to implementing a new growth strategy. At least, that's the message from the just-completed annual China Development Forum, one of China's most important dialogues with the outside world.

There were no surprises in the basic thrust of the strategy: a structural shift in China's investment- and export-led growth model toward a more balanced consumer-based and services-led economy. Such a transformation reflects both necessity and design.

It is necessary because persistently weak global growth is unlikely to provide the solid external demand for Chinese exports that it once did, but it is also essential, because China's new leaders seem determined to come to grips with a vast array of internal imbalances that threaten the environment, widen income inequality and exacerbate regional disparities.

The strategic shift is also a deliberate effort by Chinese policymakers to avoid the dreaded middle-income trap, a mid-stage slowdown that has ensnared most emerging economies. Developing economies that maintain their old growth models for too long fall into it, and China will probably hit the threshold in 3 to 5 years.

Three things from this year's China Development Forum deepened confidence that a major structural transformation that will enable China to avoid the middle-income trap is now at hand.

First, a well-articulated urbanization strategy has emerged as a key pillar of consumer-led rebalancing.

Urbanization was emphasized by Vice-Premier Zhang Gaoli in the forum's opening remarks and again by Premier Li Keqiang at the closing, and considerable details were provided in many of the working sessions. Urbanization is a building block for consumption, because it provides powerful leverage to Chinese households' purchasing power. Urban workers' per capita income is more than three times higher than that of their counterparts in the countryside.

The urban population in China reached 52.6 percent in 2012, up from 18 percent in 1980, and it is expected to rise toward 70 percent by 2030. If ongoing urbanization can be coupled with job creation, a distinct possibility because of China's emphasis on developing its embryonic labor-intensive services sector, the outlook for household-income growth is quite encouraging.

The pace of urbanization should dispel Western doubts stemming from concerns over so-called ghost cities and chronic over-investment. According to research by the global management consulting firm McKinsey & Company, with the annual influx of new urban residents totaling 15 to 20 million, China will need more than 220 large cities - at least one million inhabitants each - by 2030, up from 125 in 2010.

Moreover, because urbanization is a capital-intensive endeavor and China's capital stock per worker, a key driver of productivity growth, is still only 13 percent of the levels in the United States and Japan, China will remain a high-investment economy for years to come.

What is new today is the focus on urbanization's negative externalities, especially the thorny issues of land confiscation and environmental degradation. A well-developed "eco-city" framework was presented at this year's forum to counter both concerns. It features incentives to promote a new urbanization model, one that stresses compact land usage, mixed modes of local transportation, lighter building materials, and non-carbon energy sources.

Second, the new government is focused on strengthening the social security net as a pillar of a modern consumer society. In particular, owing to the hukou, China's antiquated household registration system, access to public services and benefits are not portable. As a result, migrant workers, an underclass numbering roughly 160 million, remain shut out of government-supported healthcare, education and social security.

Holes in the social security net have led to high and rising levels of precautionary saving, driving a wedge between increases in income and any impetus to discretionary purchasing power. Significantly, there were strong hints from senior Chinese leaders at the forum that hukou reform is now under active consideration. While that would be welcome, such efforts need to be accompanied by an expansion of benefits. China's retirement system has only about $430 billion of assets under management (national and local government social security and private-sector pensions).

Third, and possibly most important, is the quality of China's new leaders. From President Xi Jinping and Premier Li Keqiang on down, China's new leadership team is quite sophisticated in terms of analytics, risk assessment, scenario modeling, and devising innovative solutions to tough problems.

Moreover, under the organizational umbrella of the National Development and Reform Commission, the latter-day version of the old central planning apparatus, China has marshaled considerable resources into the formulation of a comprehensive and well-thought-out economic strategy.

However, it will take more than strong policy and analytical skills to deal with the tough economic challenges that lie ahead, as has been repeatedly demonstrated in the West in recent years, and there are no guarantees that China's newly installed leaders will avoid comparable pitfalls.

Vision and strategy are vital, but it will take courage and determination to tackle what is perhaps the biggest obstacle of all to any new growth strategy resistance from deeply entrenched local and provincial power blocs. To overcome these, strong words must be accompanied by bold action.