How will reform help China’s people?
Over the past 25 years, China’s economic model of industrial, export-led expansion has produced an average annual growth rate of nearly 9 percent. This has transformed China into the world’s second largest economy, lifting millions of people out of poverty. Despite such remarkable progress, the pace and structure of China’s economic growth has produced significant problems, both economic and social.
The country’s export-driven development has left China vulnerable to economic slowdownelsewhere in the world (particularly in the United States), and to rising energy, materials, and labor costs.
The manufacturing and export focus of the economy has also led to widening disparities between rich and poor. There are, in effect, two Chinas — a wealthy elite and developing middle class along the coast, and 800 million poor in the central and western interior. The worsening wealth gap and the resulting social dichotomy have led toincreasing political instability in China.
China’s 11th Five-Year Plan, ratified by the National People’s Congress in 2006, seeks to address these two problems by pursuing a shift in production from industry to services, discouraging internal investment for the purposes of producing exports, and facilitating the development of domestic consumer demand.
The critical importance of an open, competitive and effective financial system to the achievement of China’s economic goals is clear.Maintaining exceptional rates of economic growth and job creation in China increasingly depends on an effective system for mobilizing investment capital. China’s banking system intermediates nearly 75 percent of the economy’s total capital. In other developed economies, 80 percent is obtained through the capital markets. Despite recent improvements, credit analysis, loan pricing, risk management, internal controls and corporate governance practices in China’s banks remain inadequate to meet the demand for growth. Likewise, China’s equity and bond markets are among the smallest and least developed in the world.
More fully developed capital markets would provide healthy competition to China’s banks and support the development of alternative retail savings products, such as mutual funds, pensions and life insurance products. More developed capital markets would also enhance access to bank capital by smaller businesses and consumers.
Increasing domestic demand by activating the Chinese consumer will require the availability of financial products and services — personal loans, credit cards, mortgages, pensions, insurance products, and insurance intermediary services — that will eliminate the need for “precautionary savings” and facilitate consumption. As but one example of the potential impact of modern financial products, of China’s 1.3 billion people, 480 million use cellphones, but only an estimated 1 million currently have a credit card.
A more modern, open and competitive financial system would greatly enhance the productive capacity and stability of the Chinese economy. China would also be better positioned to maintain high rates of growth and job creation, encourage a structural shift from industry to services, promote the development of domestic consumer demand, reduce poverty and ensure a more equitable distribution of opportunity and prosperity for all the people of China.