• Thu
  • Dec 25, 2014
  • Updated: 9:03am
PUBLISHED : Monday, 21 October, 2013, 3:56am
UPDATED : Tuesday, 22 October, 2013, 11:34am

Little evidence of reform so far from China's reformist leaders

Despite weakening activity in key sectors, the new leadership team shows little desire to implement sweeping economic liberalisation

Investors found Friday's news that China's economic growth rate accelerated in the third quarter encouraging.

Coming on top of the latest deal to raise the US debt ceiling, the release fuelled a modest rally in financial markets, with the Hang Seng Index rising 1 per cent on the day.

But financial markets take a notoriously short-term view. Try to peer a little further into the future, and if you are an optimist, the pick-up in China's growth to 7.8 per cent from 7.5 per cent in the previous quarter becomes mildly troubling. If you are a died-in-the-wool bear, it begins to look downright scary.

To bulls, the latest data looks troubling because of the weaknesses that lie behind the strong headline number. Although the overall growth rate was higher in the third quarter, September's figures revealed that activity in key sectors was weakening.

The growth rate of industrial production slowed 10.2 per cent from 10.4 per cent a month earlier. The growth of fixed-asset investment fell, too, while retail sales also grew more slowly.

Noting the pattern, many China-watchers predicted a weaker performance in the last quarter of the year.

"This could be as good as it gets," commented analysts at Capital Economics.

"The recovery ended in the third quarter," added Nomura economist Zhang Zhiwei, forecasting a growth rate of just 6.9 per cent for next year.

Most observers don't find that prospect too unnerving. They have already accepted that China's days of double-digit economic expansion are over.

And with hopes high that the country's new leadership will set out an agenda of free-market reform and liberalisation at next month's Communist Party bunfight in Beijing, they believe slower growth will assist a much-needed rebalancing towards a more consumer-driven economy.

That's the optimistic viewpoint.

The pessimists, meanwhile, doubt either the leadership's appetite for liberalisation or its ability to apply real reforms.

They note that more than six months after the new leaders were installed in their offices of state, and almost a year after they took the reins of the Communist Party, China's new generation of reformers has yet to announce any actual reforms.

Instead, this handover of power, like previous transitions, has been marked by a pronounced expansion of credit to fund a pick-up in state-backed investment.

The first chart below shows the year-on-year growth rate of total social financing - Beijing's broadest measure of economy-wide credit.

Although the latest financing splurge is dwarfed by the massive lending binge of 2009, it is still bigger than the credit spree that funded China's pre-Olympics investment boom.

The difference this time is that China is getting less growth bang for its credit buck. With much of the industrial sector suffering from overcapacity, companies have proved reluctant to invest in new plants.

As a result, the latest credit expansion has shown up most clearly in the property market, where prices have risen sharply in recent months.

But with underlying activity in the real economy relatively sluggish, the continued growth of credit, especially through the shadow financing market, has heightened fears that China is heading towards a severe debt crisis in a couple of years' time.

A vigorous programme of economic reforms, including interest rate liberalisation, the deregulation of state-dominated sectors, plus land and household registration reform, would help fire up new engines of growth.

But the pessimists hold few hopes for next month's party plenum, which they say is aimed primarily at cementing the new leadership's grip on power. They expect lots of ideological gobbledegook, but few, if any, detailed policies.

Precedent, it has to be said, favours the pessimistic view of the plenum. Still, perhaps this time really will be different.



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This article is now closed to comments

@"The pessimists, meanwhile, doubt either the leadership's appetite for liberalisation or its ability to apply real reforms"
Why do the Chinese people need these so-called "real reforms"?
The Chinese government has done a better job at managing its economy and improving living standards of its people than any Western "democratic" country over the past thirty years. Let them continue to get on with this and stop telling them how to do it.
Financial market predators: Those who are working and waiting for serious weaknesses to appear in the Chinese economy in the course of hasty reforms so they could raid on Chinese people’s wealth. Ask the former Malaysian Prime Minister Dr Mahathir Mohamad what happened to his country during the 1997 Asian Financial Crisis and President Putin of Russia what happened to his country during and following the heydays of former President Gorbachev’s reforms. And why he cried when he won the 2012 Presidential election.
Global hegemonists: Those who are having recurrent and aggravating nightmares that if the Chinese economy keeps growing at close 8% a year, it will be the world’s largest by the end of this decade and more than double the next largest economy by 2030 and all the implications this situation will have on the global geopolitics.
Capitalist market economists: Those who believe that a socialist market economy cannot and should not work. Capitalist dogma demands that, notwithstanding accumulating evidence over more than 30 years. Any working socialist market economy is only transient and would in time morph itself into a capitalist one. These people are part of or closely associated with the financial market predators.
Others: Those who wish to see China fail or cease to develop further and do not fall into any of the above categories.
Of course, those who are hoping for Gorbachev Reforms (meaning reforms that cause short-term pain and long-term maim) for the Chinese economy will be going to be disappointed as no Chinese leader wants to go down in history as China's Gorbachev. So sinophobes, China bears, financial market predators, global hegemonists, capitalist market economists and others are going to be disappointed to varying degrees.

Whatever they are when Chinese leaders talk about reforms, they certainly do not mean Gorbachev Reforms. So long as Chinese leaders do not forget the Deng Wisdom of crossing the river by feeling for the stones, China’s economy would not take a catastrophic turn. This Wisdom implies that, if you cannot find the stones, then do not cross the river. China’s economy is not in the state of economic emergency unlike the economies in the West. Sinophobes and vested interests are trying very hard to scare a healthy Chinese economy into a crisis by transforming a possible economic crisis in 2030 into an immediate one.
Sinophobes: Those who dislike or hate things Chinese. They are not exclusively white. They come in various colours. They are extremely allergic to the thought of a prosperous, thriving and harmonious China.
China bears: Those who bet heavily on a Chinese economic disaster. These people wake up in the morning to find their fabulous fortune still in the dreamland.
I am a kind of optimist. Currently China encounters its second round of reform. The first one which leaded by the first generation of reformlist of Deng Xiaoping in 1979. And this reform period has last for more than 30 years, which bring pronounced economic growth in China and make China gradually becomes the focal point of the world again. However, halo of economic driving engine from the previous reform is slightly fading as the global economic marketing is changing. On the basis of the China's current economic system, which is the government controls the market, any kind of economic measure must comes from the highest-rank people in China. These poeple and their think tank will determine what kind of measures can be properly applied to the markets. so the chief leaders' intellegence,courage and abilities are quite essential to the second round reform. I look forward to a bold and big changing for the model of economic development in China, which can bring China into a healthy and sustainable development track.


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