Hamish McRae: Let's hope the Chinese start spending money on themselves

The aim is to make an economic transition from a gallop to a canter, then a trot
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The Independent Online

So China is to slow down, just a little. The new growth target for the Chinese economy, endorsed at the National People's Congress taking place this week in Beijing, is 7.5 per cent annual growth, down from the 8 per cent target that has been in place since 2005.

It is true that during this time growth has exceeded that target and it may well exceed the new one. But the cutting of the target is important to us all, for it tells us something about the way the country's leadership sees the Chinese economy developing. It has to slow down in the years ahead. Their aim is to find a way of making this transition: moving from the present headlong gallop, first to a brisk canter, then to a trot, and – a generation hence – to a sedate and sustainable walk.

There are three intertwined stories: what is happening to the economy now, the shifts envisaged in the new five-year plan, and the long-term role of China in the world economy. A word about each.

The immediate issue facing China is how to engineer a so-called "soft landing" from the investment boom that has been driving growth for the past three or four years. When the developed world plunged into its recession, the Chinese authorities set in motion a huge investment programme, particularly in housing and infrastructure. We in the rest of the world felt the effects of this in soaring prices for energy and raw materials. But this programme created stresses, which showed up in inflation, and has left the country with an awful lot of unoccupied property. Eventually, demand for all those empty flats will pick up, but, meanwhile, the country needs to cut back on investment and to switch to consumption.

To us, that might seem strange. We are always being told we consume too much and do not set aside enough resources for investment. But you can over-invest, too, and in the case of China, consumption has been less than 40 per cent of GDP (here it is about 67 per cent). So the idea is to get people to spend more on themselves. Buying more cars is one example: JD Power has estimated that the market will be 30 million cars a year by 2018.

The question is whether the country can engineer this shift towards consumption in a smooth manner. It is impossible to do more than observe that so far at least the country has managed to sustain its race for growth, and the general perception seems to be that it will indeed achieve the soft landing. This is the conventional view but probably the right one.

The second issue concerns the new five-year plan. The cut in the projected growth rate is the headline, though, from a British or European perspective, 7.5 per cent growth seems pretty heady stuff. Actually more interesting is the way in which the Chinese authorities see the direction of the economy changing. There is the shift towards consumption and away from investment noted above, but also a shift towards service industries. In the parts of the country with the highest labour costs, around Shanghai, they are planning to switch to higher-valued-added services. The central point here is that China will gradually follow the path of the advanced world, moving from agriculture, to manufacturing, to services.

That leads to the third issue, China's place in a steady-state world. There are all sorts of predictions as to when it passes the US to become the world's largest economy, ranging from 2020 through to the 2040s. But demographic forces alone will determine that China becomes a more "normal" economy, growing much more slowly as the size of its working-age population plateaus and then declines. I don't think we have learnt anything new about this in the past few days. But if it is helping to focus our minds on that world, then it is no bad thing.

Room at the top – for women

There should be more women on company boards. The EU Justice Commissioner Viviane Reding thinks so; Vince Cable thinks so; David Cameron, too. The principal issues dividing the UK and Europe are whether there should be a compulsory or voluntary quota, and the target level.

Reding prefers voluntary action, but is considering compulsion, and wants the proportion to rise to 30 per cent by 2015 and 40 per cent by 2020. The UK wants a voluntary target of 25 per cent.

It is clearly an idea whose time has come. It is difficult to find hard evidence that corporate governance is improved by women on the board, but there are strong common-sense arguments in favour.

There is one immediate issue. It is easier to draft non-executive directors than executive ones: for the former, the pool of suitable women is quite wide, but the numbers actually working in management are much smaller. But maybe this does not matter so much: boards are about general direction and applied common sense. For that, better gender balance can surely make a huge contribution.

h.mcrae@independent.co.uk

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