Conference Presentation, Panel, Fireside Chat
Reform 3.0: China's Next Direction
Milken InstituteEvan Feigenbaum, Robert Hormats, James McGregor, Perry Wong, Mei Fong, Bob Hormats, Jim McGregor
- The export-led growth model is slowing, necessitating a shift to a consumption-driven model where household consumption, currently under 40% of GDP, must grow faster.
- Reform efforts face political challenges from vested interests, with results expected to materialize over a period of a few years.
- Leadership priorities have shifted from pure growth rates to the quality, equity, and implications of growth, including the potential to become the world's largest economy in five to ten years.
- Urbanization strategies are moving toward tertiary and smaller cities to align industry with labor sources, alongside a plan to legalize the status of 25% of urban residents via hukou reform.
- Hukou reform acceleration, potentially legalizing 10 million migrant workers annually, could drive growth for 20 years or more.
- Pollution is identified as the single biggest challenge, prompting expected dramatic moves toward renewables, natural gas substitution, and a potential carbon tax before the US.
- China is expected to invest more in renewables than any other nation to address CO2 emissions, despite currently being the largest polluter.
- Fracking technology application in China remains uncertain due to differing geological formations compared to the United States.
- Energy supply chains are projected to become increasingly reliant on Gulf imports, necessitating a focus on maritime security and freedom of navigation.
- The government is expected to use environmental challenges and external market conditions to force internal changes against vested interests.
- Intellectual property protection is expected to improve significantly to support the "going-out" strategy, though cyber piracy remains a major source of ongoing distrust.
- Family planning functions are expected to be split between the Ministry of Health and the NDRC, signaling the winding down of the one-child policy.
- Demographic trajectories are described as frightening, with the goal to get rich before getting old, contrasting with historical precedents in Europe and Japan.
- Social dissatisfaction risks arise from college graduates facing white-collar job expectations in an earnings environment comparable to migrant workers.
- Social protests are expected to continue at a rate exceeding 100,000 per year, creating a dilemma where reform speed impacts stability.
- A "holistic" approach to governance is considered necessary to prevent divergence between economic experiments and the political system.
- Decentralization of fiscal authority and project approval to local and provincial governments is a key reform area to watch.
- Financial reforms aim to rationalize capital allocation, enabling the private sector to access capital and transitioning the nation from savers to investors.
- Market-based energy pricing is expected to replace subsidy regimes benefiting state-owned enterprises.
- Pension and social security reforms are expected to address vast unfunded mandates currently burdening local governments.
- State-owned enterprises are expected to be forced to pay dividends to fund government coffers.
- Local government funding is expected to shift from land sales to a national property tax, similar to a 1990s experiment.
- A municipal bond financing system is expected to be implemented to increase transparency in funding.
- Real estate tax implementation is expected to clear inventory and fund local governments despite resistance from officials holding real estate assets.
- Debt and equity markets are expected to open to attract private sector investment for urbanization as the central government cannot front-load capital at previous scales.
- Financial market experimentation in tertiary cities is expected to continue using instruments like dim sum and panda bonds to enhance RMB convertibility.
- Xi Jinping is expected to maintain a strong grip on the party apparatus and military, focusing on building a better military machine.
- Military planning is expected to prioritize the Navy to protect maritime interests and sea lanes for energy imports from the Middle East.
- Change is not expected to come via a Jasmine Revolution or multi-party elections, with the likelihood of top-down reform or potential violence if the party does not reform.
- The government is expected to run ahead of demographic and social expectations to maintain stability.