Is China’s transition working? Here are the five signs to look for

March 28, 2013
March 28, 2013

Yale University economist and famous China bull Stephen Roach has long argued that the country can shift its economic model from investment and exports to consumption-driven growth. China’s new leadership team, which took office only three weeks ago, has only made him more confident.

“I’m impressed with this leadership team,” said Roach, speaking at an Asia Society event on Wednesday. “They’re a cut above leadership I’ve seen in all my years in China.”

Roach highlighted five reforms that will signal if president Xi Jinping and his crew are moving in the right direction. (The first three are crucial, he noted, while the last two are less critical.)

1. Lifting of the hukou system. China’s urbanization process will create 100 new cities of more than 1 million in population in the next 17 years. Removing the household registration system, called “hukou,” which limits benefits and rights that are available to migrant workers, is a crucial step in creating vibrant cities, said Roach. Plus there’s the fact that hukou is a disaster for migrants and their families.

2. Creating new urban jobs, especially in the service sector. “Urbanization is one of the pillars of their consumer society,” said Roach. “Provided [the Chinese government ] can combine urbanization with job creation—mainly focused on service sector—they’ll create a lot of labor income.”

3. Improvements to the social safety net. Funding a robust social safety net that gives households the confidence to spend rather than to save is crucial. That will result in Chinese households converting “labor income into spending power,” Roach said.

4. Interest-rate liberalization. “The interest rates consumers get on deposit accounts is depressed below market level,” said Roach. Allowing these to be set by markets instead of by the government, as they currently are, is key to boosting Chinese household wealth.

5. Shifting the dividend policy for state-owned enterprises (SOEs). As a final milestone, Roach highlighted that he would like to see a raising of dividends from SOEs, which are “piling up cash.”

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