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McKinsey: What's In Store For China in 2012?

Author: Gordon Orr
February 6, 2012

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Gordon Orr, a director in McKinsey Quarterly's Shanghai office, offers a forecast for growth in China this year: Despite food price inflation and a stagnant housing market, he writes, China should maintain a rapid rate of growth.

1. Government policies will spur consumption and investment. These moves will compensate for declining exports and a slumping housing market. To boost consumption, policy makers could pull a number of short-term levers, including tax breaks and rebates, and are likely to raise the minimum wage further. The 12th five-year plan calls for raising household disposable income by 7 percent a year; thus the government may urge large state-owned enterprises to increase wages across the board, which would pressure other companies to follow suit. Policy makers are also likely to extend a popular program offering rebates on purchases of electronics and appliances. (It fueled the sale of 200 million units, generating 450 billion renminbi--about $71 billion--in revenues from 2009 to 2011.) In addition, the government will invest heavily in manufacturing, particularly in the central and western regions, offering incentives to attract industrial companies inland. The manufacturing sector will continue to fuel China's growth, thanks in part to the lower cost of labor and the improving infrastructure in the country's interior.

2. Dominant models will emerge for reforming rural land ownership. China must consolidate its farms to increase agricultural output and reduce the income gap between rural and urban populations. Land reform could help it achieve these and other objectives, and regions across the country are testing different pilots to identify the best approaches. One in the city of Chongqing, for example, helps farmers move to cities and thus gain access to education, health care, and pensions, which may be unavailable in rural areas. Participants have the option of keeping or giving up their land use rights in the process. A pilot in Chengdu, aiming to bring jobs and development to the countryside, gives rural populations rights typical of those urban residents enjoy. Thanks in part to this initiative, more than 90 percent of Chengdu's rural residents now have medical insurance.

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