MNI INTERVIEW: Consumption, Upward Yuan Mark Beijing's Pivot

Beijing’s pivot toward consumption-led growth and industrial upgrading, underpinned by a stable and modestly appreciating yuan, marks a new phase in China’s macroeconomic policy, a prominent economist told MNI, pointing to the latest Five-Year Plan draft’s emphasis on driving economic development through stronger domestic demand.

The 15th Five-Year Plan, proposed by the Fourth Plenary Session last Thursday, reflects new requirements for high-quality growth, while ensuring the economy maintains momentum, said Sheng Songcheng, professor at Shanghai University of Finance and Economics and CEIBS, and former head of the statistics department at the People’s Bank of China. (See MNI: Relaxed Policy To Drive PBOC Over Next Five Years - Advrs)

Sheng estimated China can still sustain average annual GDP growth above 4.5% over the coming decade, consistent with the target of reaching moderately developed economy status by 2035, when per-capita GDP is expected to surpass USD20,000. Boosting consumption is now an imperative, Sheng said, noting consumption can both support growth directly and stimulate demand for high-quality, efficient investment. “A positive interaction between consumption and investment should be achieved,” he noted.

To support that shift, Sheng suggested tax reform that better incentivises local governments to promote consumption, including improving the value-added tax distribution system so revenue flows more to where consumption occurs rather than where production takes place. 

YUAN USAGE

The yuan’s global role will also expand as outward direct investment increases and trading partnerships diversify, Sheng said, highlighting the need for a stable currency with a broadly upward trend to support this process. (See MNI INTERVIEW: PBOC Should Be Flexible, Let Yuan Strengthen-Yu)

ODI flows surpassed FDI for the first time in 2015, while exports to Belt and Road countries now account for 47% of the total, reducing reliance on the U.S. and other major markets. China’s trade surplus with the U.S. as a share of its total surplus dropped to 36.4% this year from more than 92% in 2018.

Sheng encouraged broader adoption of the yuan in trade settlement to mitigate exchange-rate risks, noting the share of yuan settlements has reached 30% of the value of goods trade, with some regions such as Guangdong seeing rates above 50%. The yuan has emerging safe-haven characteristics thanks to the authorities' commitment to a stable yuan, low inflation, a persistent trade surplus and large foreign reserves, he argued. That “quasi-safe-haven” status could boost its weight in global portfolios, reduce volatility from capital flows and give the central bank more room for monetary easing.

STRUCTURAL REFORM 

Still, structural challenges continue to weigh on the economy. Excess capacity persists, with the third-quarter industrial utilisation rate at 74.6% – below the 2006-2019 average of 77%. Sheng warned that the shift toward a consumption-led economic model must be paired with a stronger virtuous cycle between spending and investment.

Pointing to the Fourth Plenary Session communiqué’s focus on building a modern industrial system and advancing high-level scientific and technological self-reliance, Sheng said developing producer services will be key to better integrating technological innovation with industry and boosting demand.

These sectors – including R&D, IT and business services – account for just over 30% of China’s GDP, still far below the 47.5% share in the U.S., despite American manufacturing making up only around 10% of GDP.