The changing leadership in China this past week marks a shift in one of the world’s most rapidly growing countries. Though, drastic shifts in any policies are not at all anticipated.

Hu Jiantao, the outgoing Chinese President focused on three areas in his speech advising future leaders as he stepped down. These 3 topics echoed the three economic themes that ran through the 12th Five Year Plan release in 2011. The three focal points of the new incoming party will be : increasing domestic demand, raising productivity and the environment.

Demand: While the amount of disposable income in many Chinese households has increased, the average rate of saving has also climbed. Current saving rates are hovering around 44% in mainland China and closer to 50% in big cities such as Shanghai and Beijing (McKinsey), exposing the average consumers fears of the future. In order to get citizens spending more, the government is going to have to show drastic improvements to healthcare and pension programs to ease concerns over the weak social safety nets. Changes to the one-child policy and land ownership rules will also soothe concerns about needing large savings.

Productivity: Competition brings about the best solution. China has stated it will begin to slowly open up sectors that have been dominated by state owned companies. This includes the energy and mobile sectors, which will slowly allow private enterprises to compete. But most notably, changes have begun in the banking sector. Recently a measure was passed that increases the quotas allocated to foreign investments, giving western companies an opportunity to reap more benefits from larger investments. Also tax incentives and the ability to move renminbi out of China more efficiently are being used to draw foreign funds.

Environment: Agricultural reform was mentioned in the last 5 year plan as a priority and while the government has made little progress in this area, it was again raised by Hu at his congressional speech. The environment has been an issue Chinese leaders have tried to ignore but that has turned into a time bomb. Recently residents of Ningbo made their voices heard through violent protests about plans to expand a petrochemical complex in the city. While the government issue a carefully calculated concession, it is obvious that citizens are starting to take a stand for their environment and that the government will not be able to ignore it much longer.

While drastic changes are not on the horizon for Chinese governments, small alterations to the economy and social pressures will certainly create a transformed consumer market visible in the next few years.

A short and easy run-down of how the Chinese communist party works: WSJ Interactive Graphic

Entire 12th five-year plan.

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