How will the 19th Congress change China?
China will become more wealthy but before that, there will have to be more investment in technology which means more debt
The 19th Congress has envisioned the broad use of technology from production to consumption. That means investment in technology will increase and would probably be classified as infrastructure investment, e.g. extending telecommunication networks into the rural region.
However, this is not without its risks. This echoes the People's Bank of China Governor Zhou's sentiments that local governments are spending more than they can repay in the future. Government debt is now under the radar.
Retail sales shows a promising consumption story. Catering continues to grow steadily at around ten percent year-on-year, which hints that the middle-income class has spare cash for dining out. But this is just today. In the coming years, consumption is expected to grow tremendously if the 19th Congress’s plan to narrow the urban-rural difference continues. Spending from rural consumers was only 14 percent of total retail sales in the first three quarters of 2017 which means there is a lot of room to grow.
The 19th Congress blueprint
There are three main hurdles to overcome
We think the blueprint could potential be achieved earlier than 2050 given that Xi has consolidated power to execute his plan. But there are risks, and we see three main hurdles that will need to be overcome:
Hurdle 1: A build-up of central and local government debts
Technology needs more infrastructure investments but the preparation stage requires the government to spend a lot of money. This will put pressure on gross government debt.
Hurdle 2: Narrowing the wide urban-rural living standards gap
Given the gap between urban and rural livings standards is already wide, this will be a challenge.
Incomes are rising slightly faster in rural areas (8.7% vs. 8.3% in urban centres), but the level of urban disposable income is still 2.8 times that of rural. Likewise, consumption is 2.3x higher, albeit as with incomes, spending is growing more rapidly in rural areas (8.6% annual growth vs. 6.2%)
Hurdle 3: Beware of trade and geopolitical conflicts
Other countries would feel the threat in terms of economy size, development of technology, and beefing up military power
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