China’s National People’s Congress

China’s National People’s Congress (NPC) remains in session. For the first time, I see less deliberation on income inequality among provinces, and seem to be more concerned about the strength and durability of global recovery and domestic private demand. It also plans a gradual exit of macro stimulus but leaves room for more tightening or relaxation later on.

The economic crisis has also exposed the inefficiencies of China’s export-dependent economic model. For years, China’s leaders have recognized the risks of the current economic model. Chinese President Hu Jintao came into office eight years ago with the ambitious goal of closing a widening wealth gap by equalizing economic growth between the rural interior and coastal cities. Hu inherited the results of Deng Xiaoping’s opening and international trade. Even Hu’s predecessor, Jiang Zemin also recognized these problems. To address them, he promoted a ‘Go West’ economic policy designed to shift investment further inland. But Jiang faced the same entrenched interests that have opposed Hu’s efforts at significant change.

Social pressures are convincing the government of the need to raise the minimum wage to keep up with economic pressures. The basic rural pension pilot program will expand to 23 counties in 2010 while the government’s contribution to rural medical insurance will increase. Tax rebate and other subsidies on electrical appliances and automobiles will continue this year with more funds budgeted for this purpose. At the same time, misallocation of labour and new job formation incentives in the interior are causing shortage of labour in some sectors in major coastal export zones.

The core of the Hu policies is an overall attempt to re-centralize economic control and that would allow the central government to begin weeding out redundancies left over from Mao’s era of provincial self-sufficiency, which the Deng and Jiang eras of uncoordinated and locally-directed economic growth often driven by corruption and nepotism exacerbated. In short, Hu planned to centralize the economy to consolidate industry, redistribute wealth and urbanize the interior to create a more balanced economy that emphasized domestic consumption over exports. However, Hu’s push, under the epithet ‘harmonious society’ has been anything but smooth and its successes have been limited at best.

Resuming some form of RMB appreciation is just a matter of timing, although any large and one-off revaluation is unlikely. Outward direct investment will continue to be encouraged, including in the resource sector and ‘orderly transfer’ of production capacity abroad. It helps to diversify China’s foreign asset holding as well as by-passing some fo the trade protection against Chinese exports.