Reading The Runes Of China’s Economic Reform

After 10 years managing China’s economy, prime minister Wen Jiabao has become a dab hand at under promising and over delivering. As a parting gift for his successor, Li Keqiang, he has passed on the first half of that formula, a GDP growth target of 7.5% for this year, and put a bow on it by saying it will be hard to attain.

Up to a point. China’s growth rate has stabilized after last year’s slowdown. GDP growth should come in closer to 8% than 7.5% for 2012 and edge above 8% this year. The IMF, for one, is estimating 7.8% growth in 2012 and projects 8.2% growth for 2013.

What Wen is also signaling, and has been for some years, is that China’s three decades of double-digit annual growth is over. As with Japan and South Korea before it, the country’s rapid-growth industrialization has run its course. Sustaining growth over its next phase of development demands market-oriented structural reforms and a rebalancing of the economy away from state-driven investment and more towards private consumption.

In the immediate future, investment will continue to power growth. It is policymakers’ fall back position when the economy needs stimulating, and can be done without having to take on deeply entrenched vested interests as both structural reform and rebalancing require.

How far and fast the new leadership can push ahead with those longer-term changes depends on the factional balance of power at the top of the Party. The outcome of the National People’s Congress currently being held in Beijing should provide clues via new government appointments. ministry realignments  and policy pronouncements as to how that falls, and thus the scale of the changes the new leadership feels able to take on.

The policy program will doubtless be ambitious, but it is the timetable that is critical. So is the policy effort that will be devoted to issues such as corruption, urbanization, local government governance, pollution and food and product safety. They all have economic consequences, but even more importantly potential impact on the Party’s legitimacy to rule.