24 October 2016
China needs to transition its economy to higher value-added activities. Photo: Bloomberg
China needs to transition its economy to higher value-added activities. Photo: Bloomberg

China has a long way to go in economic transformation

At its recent plenum, the Central Committee of China’s Communist Party has emphasized two points in its policy objectives.

Firstly, it aims to double the gross domestic product (GDP) per capita and average income of urban and rural residents by 2020 from the 2010 levels. Market consensus is that an annual growth rate of 6.53 percent can secure that target.

Secondly, it removed the one-child family plan restriction and allowed all couples to have two children, as part of efforts to boost domestic demand.

However, the 13th Five-Year Plan is a long-term one. What we should be worried about now is the near term economic data, especially given that both the Caixin Purchasing Managers Index (PMI) and the official PMI are still at contraction level.

Although Premier Li Keqiang has said several times that a “hard landing” won’t happen, the recent economic data raises concern that we cannot rule out the possibility.

China’s economic transformation and innovation and high-technology goals are yet to be achieved. Meanwhile, growth in industry output has fallen sharply.

In addition, GDP, although higher than market expectation, came in at a weak level of 6.9 percent for the third quarter.

Another thing we should take note of is the inflation figure.

There had been expectations earlier that the consumer products index (CPI) would stay at 2 percent monthly average. However, due to a notable decline in pork prices, September CPI was only up 1.6 percent.

The government’s stimulus efforts have only had limited impact so far in boosting domestic demand.

The global economy is sluggish. Some countries will continue to enlarge the scale of their quantitative easing measures, which could pose even greater challenges for China.

Beijing is aware of this danger, so it is striving to lift domestic consumption and offset the external uncertainties.

A short-term issue is whether liquidity supply is enough.

To resolve this, the central bank has been cutting benchmark interest rates and commercial bank reserve requirement ratios.

But those initiatives alone won’t be enough.

Authorities need to push ahead with more structural reforms in the economy to ensure long-term sustainable growth. 

This article appeared in the Hong Kong Economic Journal on Nov. 5.

Translation by Myssie You with additional reporting.

[Chinese version中文版]

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FX specialist, HSBC Global Banking and Markets

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