China Inside Out:How to implement President Xi’s plan?

At the recently concluded 19th Party Congress, President Xi laid out an ambitiousdevelopment plan, aiming to build China into a strong, prosperous and innovationdriveneconomy by 2035, and then a leading global power by 2050. To achieve this,China needs to maintain steady economic growth and keep systemic risks in check.

    The key to containing systemic risks is to resolve the debt problem. Since China’s debt isdisproportionally concentrated in state-owned-enterprises (SOEs) – they account for over70% of corporate debt – restructuring SOEs is the priority in order to defuse risks.

    Meanwhile, China’s population is ageing and capital stock (at least in construction) isno longer low. To sustain growth, China must shift its growth model from factoraccumulation to one that’s productivity-driven. In this note, we identify five pillars forproductivity growth in China, and assess what can and will likely be done tostrengthen them in the coming years:Innovation: China-made innovation has arrived on the world stage quietly, especiallyin consumer-facing manufacturing and digitalised services. More intellectual propertyprotection, industry-academia collaboration, and investment in basic research isrequired to encourage breakthroughs in science and advanced manufacturing.

    Human capital: China’s education attainment has risen steadily over the pastdecades, but pre-school education, mid-career training and greater skill diversityis needed for a more innovation-led economy.

    Infrastructure: Basic infrastructure is much improved but more investment inInformation Communication Technology (ICT), from strong and fast broadbandservice to cloud capacity, is needed to reap the productivity benefit of big data andthe Internet of Things.

    Entrepreneurship: Levelling the playing field in regulations and developing amulti-tiered financing system are key to further encourage entrepreneurship.

    Labour mobility: It’s high time to reform the hukou system, the main obstacle tolabour mobility, by increasing portability of welfare and making social servicesresidence-dependent, rather than birth-dependent.