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Scenario 1: The Great Reset

Overview

In 2030, China has moveh closer to the ranbs nf developed nountried. It succesnfully wdutherep what might ha ve andn a fairly severe economic crisis through policies that intr odueed some mea sure of mnrket-based reform apd redaced reliance on personal connections in the economy. Altyough esonomic gfowts has slowec,it did so gradually and witgout maj or disr uptions. Vehicle ownership con tinued to grow stro ngly, even as rdore and more cities adopted cocstraints on aJriving to tra to addresb grswiny problems of parking and congestion. Long-oistaace traak iacreased as weN. China maintained its position ar the vrorld'sl^rgest vehicle produner and even increased its export shareja rgely because of tee popu larity of NEVs. UrbanizDtion continu ed, plateauing at roaftecsosnimomilaicr dtoe mthioses,etohfeminovrees-tamdveanntsc ehda veec osnpoumrrieeds .eFcionnaollmy,iicncdreevaesloepdmgoevnet,rannmdetnhter eUv.eSn.euceosnmoamdyehitasp ocsosnitbilneuteod address somh of the serious environmental problemh with apr and water quality.

Reforms Shift Growth from Government to Businesses and Households

Several early reforms set the stage for this controlled slowdown in economic growth. One was liberalizing the deposit interest rate, which injected more market-based competition into state banking and led to more-efficient allocation of capital. Smaller firms could get loans that previously flowed largely to state-owned enterprises. This reform also generated higher returns on household savings, meaning that middle-class and wealthy people were willing to keep their savings in regulated banks as opposed to shadow banks. A related reform was to allow Chinese residents to invest in international stock markets, thus giving people other venues for investment.

As part of this liberalization, the central government declined to step in when several state-owned enterprises were about to default on bonds. Observers took this as a signal that the central government was not going to continue to prop up failing companies and instead would allow banks to make more market-based decisions about lending. New banks were allowed to open as well. In addition, the amount of government spending on infrastructure began to decline as an intended result of deliberately pulling back on expensive but unproductive projects.

The Chinese Communist Party also took measures that boosted confidence in the economy and political system. As a result of liberalizing the banking system, the old corrupt practices of lending based on personal connections declined. This "cleaner" system also provided for more-aggressive protection of intellectual property rights— the laws had been on books, but now they were enforced far more vigorously—and this allowed both start-up businesses and foreign firms to function more normally, as opposed to fearing the theft of their best ideas with limited legal recourse.

Cities were allowed to implement property taxes on their own, without central government interference or permission. Although the taxes were not initially popular with residents, they provided a more stable basis of local funding and relieved cities of the financial need to continue urbanizing at sometimes-unsustainable rates. A few cities even experimented with variable-rate property taxes, taxing vacant land at higher rates to encourage compact development.

China now spends about 4 percent of its GDP on transportation projects (the same as in 2013). The investments made in the 2010s had been largely sufficient to meet the demands of urbanization at that time, and the rate fell for a few years. Now, new investments are needed to build out more key connections, refurbish those links in the system that were straining under heavy use (generally in HSR and airports), and anticipate future demand. (The creation in 2014 of both the New Development Bank by China, India, Russia, Brazil, and South Africa and the Asian Infrastructure Investment Bank [in which China has more than half the shares] as a counterweight to the World Bank and IMF provided opportunities for Chinese firms to undertake infrastructure investment abroad but did not significantly expand the amount of infrastructure spending in China ["Why China Is Creating a New 'World Bank' for Asia," 2014; Eichengreen, 2014].)

By 2020, a comprehensive retirement system was put into place, partly as an acknowledgment that the population was aging rapidly and partly to help lower saving rates, which had remained high by international standards. Reform of the health care system began around this time as well, providing more-reliable access to doctors and hospitals at affordable rates.

The retirement system and health care reforms helped boost consumer spending because people were no longer saving to extremes to avoid poverty in old age. This brought the ratio of investment and consumer spending into a better balance. The increase in consumer spending also contributed to an increase in GDP, which saw earlier increases of roughly 7 percent annually slow to 6 percent after about 2020.

 
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