Andrew Parker - Partner, PwC. This article first appeared in The Australian, 8 November 2017
Xi Jinping’s recent speech to open the 19th Congress of the Communist Party of China (CPC) laid to rest any lingering doubt that China is content to abide by Deng Xiaoping’s injunction to “hide our capabilities and bide our time”.
Its title, “Secure a decisive victory in building a moderately prosperous society in all respects and strive for the great success of socialism with Chinese characteristics for a new era”, was striking.
Xi has emerged as one of modern China’s most powerful leaders. His influence over the party will extend well beyond his second five-year term. Rapid rise About 40 years ago, the concept of a corporation in China was nonexistent, 80 per cent of people lived in rural environments and 70 per cent in abject poverty. Today, China is the world’s top trading nation, the holder of $US3 trillion ($3.9 trillion) of foreign exchange reserves and its citizens pose more purchasing power than any other nation on earth.
At a time when the US and Europe are looking inward, and Australians search for a compelling narrative for our own future, Xi outlined an ambitious vision for this “new era”. He announced that this would “be an era that sees China moving closer to centre stage and making greater contributions to mankind”.
Xi said he was pressing ahead with changes to “deepen reform in every aspect”, with the market playing the “decisive role” in the allocation of resources and the government “support(ing) development of private firms and stimulat(ing) vitality of all types of market entities”. He said “China’s open door will not be closed, it will be only be opened wider”.
Xi is also pushing for stronger, bigger state firms, saying the government would “promote strengthening, improvement and expansion of state capital, (and) effectively prevent loss of state assets, deepen reform of stateowned enterprises, development of a mixed-ownership economy and cultivate globally competitive world-class firms.” Tellingly, he said the party would permeate all aspects of life in China, from law to technological innovation.
This apparent ambiguity needs to be understood in the context of the scale of the challenge China now confronts. The legitimacy of the CPC and, ultimately, its survival, depends on delivering increasing incomes to a population that aspires to a middle class lifestyle. Addressing inequality and corruption are becoming as important as growth itself.
And Xi believes that the market, left on its own, is fundamentally unfair and needs the guiding hand of the party to manage the risks China is navigating.
He has set China up as the new world champion of globalisation, and the Belt and Road Initiative, now etched into the CPC constitution is the centrepiece. China’s development model — Socialism with Chinese Characteristics — is being promoted as “a new option for other countries and nations who want to speed up their development while preserving their independence”.
Many in the West believe China will not be able to innovate its way free of the middle income trap. Yet China is the leader in mobile payments and among the leaders in robotics and AI.
In his first term, Xi emphasised stability over market reform. State-owned enterprises still control key parts of the economy, the yuan remains tightly managed and debt-funded infrastructure programs are rolled out whenever growth needs a kick-start.
Whether China can escape the middle income trap will depend on whether Xi uses his extraordinary power to tackle SOE reform, reduce financial risks and leverage in the system while at the same time continuing to deliver economic growth for all citizens.
When it comes to business opportunities in China there are many unknowns. Urbanisation will continue, Chinese enterprises will continue to become more competitive and the growing Chinese middle class will demand better food, education, healthcare and old age care services. They will also continue to travel the world.
Whether this is happening at a speed of 7 per cent GDP growth or lower, we don’t know. Whether Western investors will have as much opportunity as Chinese local/state owned players, we also don’t know. But the opportunities will be there for those who are patient and careful with their steps.
How well we manage the relationship will determine how well Australia does in the coming decades. As Asia rises in relative terms, Australia will lose its place in the world as a G20 economy in the coming decade and a half. China’s impact on Australian living standards is hard to overstate
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© 2017 - 2018 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Liability limited by a scheme approved under Professional Standards Legislation.