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MENAFN - AFP - 12/11/2012

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(MENAFN - AFP) China's Communist leaders are promising to revolutionise the world's second largest economy and move on from being the world's workshop, but economists say the monumental task faces major hurdles.

Outgoing President Hu Jintao said GDP would double in a decade and pledged a "transformation of the economic growth model" in his report to the nation at the five-yearly Communist Party congress under way in Beijing.

China's rulers must maintain growth in the economy to justify their claim to legitimacy -- and avoid the spectre of social unrest.

But while selling cheap manufactured goods to the West and spending billions on infrastructure has delivered an economic miracle in recent years, the model is seen as unsustainable in the longer term, and growth is already slowing.

"We should speed up the creation of a new growth model and ensure that development is based on improved quality and performance," Hu said, adding China would seek to become an innovative technology giant as low-cost manufacturing relocates elsewhere.

The country also needs to make domestic consumption a pillar of the economy, a joint report by the government and the World Bank said in February -- endorsed by Xi Jinping, who is expected to take over as party leader from Hu this week.

But the changes could have enormous human costs in terms of job losses, which in turn could fuel unrest -- anathema to the ruling party. And training unqualified workers to compete with Western economies is a gigantic task.

A few Chinese manufacturing sectors have been able to compete directly with Western firms, including those in communications and high-speed trains.

China is also said to be developing a domestic airliner that could challenge Boeing and Airbus for sales.

But for now the economic boom remains firmly dependent on a cheap workforce, an undervalued currency and artificially low interest rates, Michael Pettis, finance professor at Peking University, told AFP.

"To be profitable in China does not require technological innovation. What matters is access to cheap credit and government connections," Pettis said.

Labour-intensive industries, such as textiles and shoes, have already begun to leave for less-developed cheaper nations including Indonesia and Vietnam.

"China will remain a manufacturing powerhouse but much of the lower end will be transferred to lower-wage countries in Asia, but also possibly to Latin America and Africa," said Jean-Pierre Lehmann, director of the Evian Group, a think tank.

China's new economic goals may mean fewer of the huge investment projects the government prioritised in recent years, such as airports, highways and high-speed trains.

Fixed-asset investment -- from infrastructure to housing -- accounted for more than half of gross domestic product last year, though it has been growing at a slower pace.

As China places less importance on exports, future growth will also be more dependent on household spending, which made up less than 40 percent of GDP in recent years.

Top economic planning official Zhang Ping said at the weekend that domestic consumption contributed more to GDP growth than investment in the first nine months of the year.

But consumption will have to grow faster to make up for any investment slowdown. And limited social safety nets in China mean households save around half their incomes in case of crises or to send their children to university -- a major brake on consumption spending.

Peking University's Pettis said: "I think we should expect a sharp slowdown in GDP growth over the next decade," as China tries to realign the economy.

With China a key driver of global growth that could have significant negative effects on the rest of the world.

Beijing was saying, "We no longer want to be the Christmas ornament capital of the world, we're happy for those low skill, low value-added, low wage jobs to go to other countries," said Andy Rothman, China economist for CLSA Asia-Pacific Markets in Shanghai.

"The biggest impact is going to be felt by people who have been exporting raw materials to China," he said, citing Australia, Brazil and Indonesia.

But there will be winners as well as losers, he added. "This is actually good for more developed economies like Germany or the United States who are shipping more complicated, advanced machineries to Chinese factories."

Reforms can be "fairly painful" in the early stages and can cause short-term unemployment "even if long-term gains are significant", said Ben Simpfendorfer, managing director of Hong Kong-based consultancy Silk Road Associates. But he added that imports from the rest of the world should increase.

If China can fulfil Hu's promises, about half of the population -- around 700 million people -- will join the middle class by 2020 with annual income between 7,000 and 23,000, the Boston Consulting Group said in a report.

On a purchasing power parity basis China is expected to overtake the United States as the world's biggest economy in 2016, the Organisation for Economic Cooperation and Development said Friday.

But even then per capita gross domestic product will still be only a quarter of the US.


 






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