China may be planning radical economic change

According to noted economist Stephen Roach:

“In early March, China’s National People’s Congress will approve its 12th Five-Year Plan. This Plan is likely to go down in history as one of China’s boldest strategic initiatives. In essence, it will change the character of China’s economic model – moving from the export- and investment-led structure of the past 30 years toward a pattern of growth that is driven increasingly by Chinese consumers.”

Roach describes three main tactics that the PRC is expected to use to implement this plan:

-directing resources to more labor intensive industries

-increasing wages throughout the country and eliminating restrictions on domestic migration to allow additional movement of workers

-creating social pension, health care, and unemployment benefit systems to reduce the perceived need to save by the populace

If these changes are in fact put into place, one result will likely be significant price increases for products sold in the US that are manufactured in China.

There would have to be major changes in Chinese banking systems to foster reduced saving, as current structures penalize consumption and practically mandate high saving levels.  The current structure is designed to funnel capital from consumer savings to export industries.

Shifting resources from the export sector will likely result in bankruptcy of many enterprises in China that are solvent now mainly due to the state support of the sector and rapid growth based on that support.  Keeping the populace that is now supported by exports pacified while the shift to a more balanced economy takes place will be difficult.

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