Having reined in inflation, mainland leaders have made economic growth the priority for next year, as Europe's debt woes and America's slowdown weigh on prospects for its export trade. They emphasised the importance of stability, with steady policy settings, 'relatively fast' growth and stable prices, including 'resolute control' of house prices. This is code for what will be a delicate balancing act. Economists predict growth will fall to 8.5 per cent next year, close to the notional level needed to absorb new job-seekers. Meanwhile, the statistics bureau says prices of new and existing houses continue to fall in large and medium-sized cities. If this correction is sustained, it could impact on economic growth by deterring real estate investment, depleting household wealth, reining in consumer spending and hitting local government revenue from land sales.
If the mainland cannot depend on export growth, it must turn to domestic growth. Indeed, the National Development and Reform Commission says that while the government will maintain an appropriate rate of investment growth to underpin the economy, the key to maintaining steady and relatively fast growth is expanding domestic demand. Reconciling the need to expand demand with curbs on real estate, which fuels it, will be the balancing act.
The Chinese consumer may be increasingly affluent, but the lack of dependable social security encourages saving at the expense of spending, making it harder to tap the full potential of domestic demand. However, there is room for removing disincentives to consumption in the tax regime. The government has already lifted the spending power of the poorest by raising the income and rural poverty tax thresholds. But it must press on with fiscal and tax reform that can make a real difference to domestic spending. The mainland still maintains taxes on items once regarded as luxury items, such as cosmetics, which along with other taxes and cost inefficiencies helps explain why so many of them do their shopping in Hong Kong. Reform is overdue. Apart from liberating demand, it would help necessary rebalancing of the economy.
State leaders are right to resist pressure to relax controls on the property sector, insofar as an inflated market not only misallocates resources but reflects expectations of an unsustainable growth pattern, given the cost to the environment and waste of resources such as energy and water. There is concern that a growth rate below 10 per cent is flirting with trouble, but that does not take account of the increasing sophistication and productivity of the mainland economy. Rebalancing of the economy towards domestic consumption will involve some dislocation. But it makes for more sustainable growth.