What To Expect From The New Leaders ?

President Xi Jinping and his Prime Minister Li Keqiang have just officially taken office. They will remain in power for ten years, during which China will have to change its economic growth model. Real GDP growth has accelerated since last autumn thanks to stimulus policies, and should exceed 8% once again in 2013. At the same time, however, China’s growth model is reaching its limits, because of the prolonged weakness in global demand, the rise in production factor costs and the imbalances it has created at the social, sector or environmental levels. While the structural slowdown in growth is expected to continue, the authorities will have to implement reforms aimed at building a more balanced model.

The annual session of the National People’s Congress that ended on March 17th was the last stage of the transition to a new leadership in China. Xi Jinping, appointed General Secretary of the Communist Party in November 2012, formally succeeded Hu Jintao as President of the People’s Republic of China, and Li Keqiang replaced Wen Jiabao as Prime Minister. The two men, set to remain in power for ten years, took office at a time when China is at a turning point in its economic development. They have sent signs in the last few weeks of being in favour of structural reforms. The most striking is the announcement of measures aimed at restructuring the administration. While the new government is expected to spell out its reform agenda by the end of the year, the need for changes in China is undeniable.

Structural slowdown
Economic growth stood at 7.8% in 2012, its lowest rate since the late 1990s, and the five-year average real GDP growth rate fell to 9.3% in 2012 from 11.7% in 2003-2007 (chart 1). Looking beyond cyclical causes (weak global demand, correction in the real estate market), this performance has also been due to structural factors: the growth model of the last decades has run its course. Since 2008, it has bumped into the weakening in G3 demand for manufactured goods, which had driven Chinese growth in 2002-2007 but could now remain persistently sluggish in the medium term. On the supply side, the Chinese industry faces an increase in production factor costs, including energy, land and labour. Between H1 2010 and H1 2012, the unit labour cost rose by an estimated 25% in local currency and 35% in US dollars (given the 8% appreciation in the CNY/USD rate over the same period). This dynamics will continue in the next few years, driven by the authorities and due to demographic pressures.

BY Christine PELTIER

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