China prepares to shield its post-covid economy from external shocks

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The plenary session of the Central Committee of the Communist Party analyzes from this Monday the new five-year plan, the roadmap for the Chinese economy until 2025

This Monday, at a discreet, military-owned hotel in northwest Beijing, 346 men and 30 women will begin a closed-door meeting: the Fifth Plenum of the Central Committee of the Communist Party of China. For four days, the 376 members -permanent and substitute- of that body will draw up the roadmap of the Chinese economy for the future, under the shadow of the Covid pandemic and tensions with the United States. Hints will emerge from their discussions about how the world’s second power plans to become more self-sufficient, a goal that Chinese President Xi Jinping has been pursuing in recent months.

Chinese leaders have concluded that the tightening of US policy toward Beijing will continue regardless of who wins the November 3 election. Added to that is the uncertainty about the course of the world economy that has been created by covid-19. His analysis: the trend towards deglobalization, which was already in the making, is going to accelerate and it is necessary to protect the national economy from it, the only one with prospects for growth at a good pace among the G20 countries.

This will be the big goal of the most important political meeting since China controlled the initial wave of covid. Headed by Xi himself, the members of the Central Committee will make it a priority when drawing up the master lines of the 14th five-year plan: the framework for economic and social development until 2025 that will be officially presented in March next year. They will also look at longer-term plans, until 2035, the year for which China wants to be a global leader in both economic power and international influence. To seal its economy against geopolitical tensions, and the foreseeable drop in exports, the Chinese response is “dual circulation.”

First proposed by Xi in May, the strategy is still vague. In the absence of the Central Committee to outline more details, in principle it is about strengthening the market, supply chains and internal technology instead of relying more on “international circulation” (external demand and innovation), as was the case. happening since the eighties.

In itself, the idea is not new. The previous government of President Hu Jintao and Prime Minister Wen Jiabao had already proposed a change in the economic model that relies less on low-value-added exports, to escape the middle-income trap. But this time, strategic necessity adds more urgency to the plan.

“Change to a dual circulation development in which the domestic cycle is the main engine it is a measure to prevent strategic risks”Said Liu Shangxi, dean of the Institute of Fiscal Studies of the Ministry of Finance. “These are important tasks during and after the 14th Five-Year Plan.”

This emphasis has raised fears of a more autarkic China in the near future, although Beijing insists that domestic development will not mean an abandonment of “external circulation.” In a speech in Shenzhen earlier this month, Xi stressed that the country will continue the reform process initiated by Deng Xiaoping and “the relationship with the external economy will also be the key to future development.”

But in August, the Chinese president himself stressed that “the domestic market will dominate the national economic cycle and the potential for economic growth that is domestic demand will continue to be released. We must make production, distribution, circulation and consumption more dependent on the domestic market, improve the adaptability of the supply system to domestic demand ”. A message that he repeated this month in the city of Chazhou, in the south of the country: although the two circulations must be applied simultaneously, the internal one must be the “main consideration”.

For some time now, foreign trade and investment have become less and less important to China. The share of trade in goods in GDP has fallen from almost 50% in 2008 to just over 30% today. It has also expanded its internal supply chains.

While waiting for the statement that the Central Committee issues after its meeting to hear the first responses, it is not clear how the Chinese authorities intend to develop this new model. Domestic consumption is still well below that of other wealthy economies: 38.8% of GDP, compared to 68% in the United States. And although it officially hopes to meet its goal of completely eliminating rural poverty by this year, the pandemic – as it has happened in other countries – has widened the gap between rich and poor. On the other hand, if the power of consumption increased, via wages for example, it would face a decrease in the competitiveness of its exports in the “international circulation”.

“China must resolve underdevelopment problems and unbalanced. There are also complex structural differences and unbalanced development problems between rural and urban areas, regions, departments and individuals that need to be resolved, ”writes Fan Peng, from the Institute of Political Sciences of the Chinese Academy of Social Sciences, in a rostrum at the Newspaper Global Times, owned by People’s Daily.

Among the tools that the Five-Year Plan can collect to resolve these disparities and encourage consumption is a tax reform that redistributes wealth. Until now, the Chinese system has placed more emphasis on indirect taxes – greater income generators – than on rents – more equal. It could also include reforms in internal residence permits (the current system prevents the 45% of rural migrants who lack it from accessing all urban social services), education, society and social security.

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