December 10, 2013 11:56 am
China seeks way to marry reform and growth
When China suffered a sharp cash crunch in June, many analysts and investors concluded that Beijing was ready to tolerate the “short-term pain” of slowing growth as it pushed through reforms to obtain the “long-term gain” of a better-balanced economy.
Yet with China cruising through the second half of 2013 with barely a bump on its economic road, a debate has begun about just how much pain is necessary after all. Can the Communist party implement an ambitious financial reform agenda and transform the country’s economic model at the same time as keeping growth chugging along at a rapid clip?
That was the view put forward this week by the China Securities Journal, an official financial newspaper. “Prioritising reforms over growth does not signify acceptance of a ‘hard landing’,” it wrote in an article that drew much attention.
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“Policies to stabilise growth can be used in the short term to mitigate the economy’s downside pressure. There is a high possibility that the economy’s growth target will again be set at 7.5 per cent,” it said.
The suggestion of a 7.5 per cent target flew in the face of what was beginning to become conventional wisdom: that China’s leadership would lower their growth aim to 7 per cent next year as a symbol of their reformist intentions.
At an important Communist party meeting in November, the country’s leaders agreed they would give market forces a “decisive” role in allocating resources in the economy. The likely results of those reforms – higher prices for energy, land and capital – are expected to drag on growth, and a lower economic target would give the government more leeway to press on with its agenda.
Some of those reforms are already in train. The incremental deregulation of interest rates has played a role in the nearly 150 basis point jump in bond yields in recent months, increasing the cost of capital for many companies. Petrol-pricing reforms have also led to more volatile and generally higher prices of energy.
However, data released on Tuesday confirmed thatChinese growth momentum remains robust, with investment slowing but retail sales picking up. The economy is believed to be growing roughly on par with the 7.8 per cent year-on-year pace it notched up in the third quarter.
This has put Lu Ting, an economist with Bank of America Merrill Lynch, in the camp that believes there need not be a trade-off between growth and reforms.
“Reforms can also support growth, especially those reforms that make growth more efficient. So I don’t understand why people think reforms have to be negative for growth,” he said.
I don’t think it’s realistic to think that you can both implement these reforms and sustain high-speed growth
- Zhu Ning, Shanghai Advanced Institute of Finance
Wang Tao, an economist with UBS, counters that the current strength of the Chinese economy in part reflects the sequencing of reforms. Measures to weaken the clout of state-owned enterprises and rein in local government debts will inevitably weigh on growth, she says. Yet Beijing has started with easier reforms that contribute to growth such as speeding up project approvals and lessening investment controls.
“In next 12 to 18 months, the initial reforms tend to be more pro-growth, while the more painful ones are likely to be delayed,” she says.
There is no question that China’s top leaders are less fixated on growth than they had been for much of the past three decades.
The lead article in Tuesday’s People’s Daily, the main newspaper of the Communist party, said the government “could not exclusively rely on” gross domestic product in its evaluation system for local officials. The paper said achievements in protecting the environment and controlling debt levels would gain more weight in these assessments that can make or break a cadre’s career.
Changing mindsets at the local level is tougher, however. “The central government can set a growth target, but when it’s passed on to local governments, 1 percentage point will be added to the target by provinces and another percentage point will be added by cities,” said Niu Li, an economist with the State Information Center, a government think-tank.
Even if China’s strong growth momentum runs into the start of 2014, Beijing faces a tall order if it is to eliminate excess capacity in heavy industry, deflate a property bubble and rein in government debt, all while contending with an ageing population.
“Personally I don’t think it’s realistic to think that you can both implement these reforms and sustain high-speed growth. The risks come from the growth pattern behind this high-speed growth,” says Zhu Ning, deputy director of the Shanghai Advanced Institute of Finance.
“To switch the growth model and address the risks, you’ll have to siphon off the excess liquidity from the system and that process cannot be comfortable.”
Additional reporting by Emma Dong
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