Yu Xiang: China's vision to rise to economic challenges

  • Yu Xiang, a senior research fellow at China Construction Bank, is a non-resident senior fellow at CISS, Tsinghua University, and a China Forum expert.

    China’s 20th party congress has laid out a promising blueprint for the future of its economy. The aim is to walk its own path towards modernisation and “high-quality development”, by adhering to party leadership, emphasising innovation and focusing on macroeconomic policies to promote stability.

    China’s policies reverberate around the globe and its economic direction is the focus of much international attention – some of it optimistic; some, pessimistic. But China, which insists on reform and opening up, has continued to make economic progress. Its success can be summarised as follows.

    First, adherence to the leadership of the Communist Party, which has provided a stable environment for China’s growth. Second, reform has broken down institutional constraints for the development of productive economic forces. Third, openness has allowed China to share its development with the world and enjoy positive feedback.

    Judging from the congress’ plans for the nation’s economic and social development, these lessons will continue to be followed, ensuring China’s long-term stable development. But persistence does not mean inflexibility, and neither should we mechanically absorb foreign ideas.

    China’s economy is worth more than 110 trillion yuan (US$15 trillion), accounting for more than 18 per cent of the world economy and firmly ranking as the second-largest. This economic heft allows China to conduct leading STEM research (in science, technology, engineering and mathematics) and withstand the headwinds of anti-globalisation and unilateralism.

    More importantly, policymakers are squarely facing up to the problems emerging in China’s economic development. The 20th congress party report acknowledges “prominent issues and problems – some of which had been building for years and others which were just emerging”.

    These include “imbalanced, uncoordinated and unsustainable” development, “deep-seated problems in institutions and barriers built by vested interests”, and that the “traditional development model could no longer keep us moving forward”.

    Policymakers are addressing these issues, instead of avoiding them or shifting the blame onto others. China’s solution is to adhere to party leadership and pursue high-quality development through its own unique path to modernisation. It will continue reforms and opening up.

    Innovation will be the most important driving force as China enters a new stage of development. Last year, R&D expenditure rose to 2.79 trillion yuan, the second-highest in the world. This is still only about half that of the United States’ but the gap means there is room for growth.

    The report also signalled a new level of openness in three main ways. First, in “institutional opening up” – China plans to continue opening up to the world through its regulations, management and standards. This includes reducing the negative list for foreign investment and optimising the business environment.

    Second, the government will “accelerate China’s transformation into a trader of quality” and as such is expected to negotiate more high-level free-trade agreements to improve foreign trade.

    Third, China will “endeavour to preserve the diversity and stability of the international economic landscape and economic and trade relations” – a concept first proposed at the congress. China aims to embed itself firmly in the global supply chain to prevent “decoupling [and the] disruption of industrial and supply chains”.

    This means China will open up its economy further to foreign investment and businesses while building on economic and trade cooperation with developed economies. It will emphasise trade and investment with developing countries, promoting the Regional Comprehensive Economic Partnership even as it works towards joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

    It will also mean that China will actively participate in the reform and construction of the global governance system to help ensure its stability.

    For the near to medium term, China’s economy will continue to be steered by macroeconomic policy focusing on the following aspects.

    First, stability. This is an important element in leader Xi Jinping’s economic thought. The pursuit of stable progress emphasises maintaining strategic determination and patience. Stability is the bedrock of China’s ambitions to build a nation that is strong in manufacturing, aerospace, transport and technology.

    Second, problem solving. The government will adhere to this approach as the core logic behind any macroeconomic policy. This means a focus on the practical resolution of problems and policy formulation. In this, macroeconomic policy will be guided by the goal of stability and a focus on preventing systemic financial risks.

    Examples include policies to improve income distribution and the social security system, which supports decent livelihoods for people so the benefits of development are shared more fairly.

    Third, problem anticipation. Policymakers will work to anticipate any potential challenges, given that the international economy faces rising inflation, increasing interest rates, towering debt and the risk of destabilising geopolitical changes. Compared to the rest of the world, China is coping with its challenges well. But it has to prevent these problems from worsening and guard against any long-term impact.

    Some domestic problems, such as the economic transition of its real-estate sector and the risk of default on some financial products, have been addressed. But the associated risks and any further fallout must still be prevented. If China’s domestic economic issues are not properly prevented and controlled, they could quickly evolve into issues of grave concern.

    (This article was first published on South China Morning Post on Oct. 28, 2022. The original title is "How China plans to rise to its economic challenges on the path to modernisation".)

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