Xi Jinping

Winds of change 'to blow through' China's economy

Some observers say the incoming leadership in Beijing is keen to push ahead with financial reform in the next few years

PUBLISHED : Tuesday, 27 November, 2012, 12:00am
UPDATED : Tuesday, 27 November, 2012, 4:08am


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Despite perceptions that China's new leadership under Xi Jinping will be conservative, some analysts believe Xi's administration-in-waiting seriously intends to undertake economic reforms.

Laura Cha Shih May-leung, a Hong Kong deputy to the National People's Congress, is one of those believers.

Cha, a former vice-chairman of the international advisory council of the China Securities Regulatory Commission, said the new leaders in Beijing would reform the mainland's financial markets in the next five years.

"The Chinese government wants to liberalise the financial market. Financial market reform has to be the top priority in the next few years," Cha said.

She disagreed with suggestions that the new Politburo Standing Committee was conservative and would not press ahead with a market overhaul.

"The leaders understand the urgency of reform and the consequences of not reforming. Not reforming does not mean that you will be at a safe stage," Cha said at an Asia Society talk.

Eventually, the yuan would be fully convertible, Cha said, and when that happened, China's financial market must be sufficiently reformed to withstand the inflow and outflow of international capital.

"Currently the financial market of China is not commensurate with the size and stature of its economy. It's hard to see how this is sustainable," she said.

On the mainland, liberalisation of interest rates was not happening fast enough, and there were not enough innovative new financial products, Cha said.

A Crédit Agricole report also maintains that China's new leaders will implement several new policies.

The report's authors base the conclusion on the speech Xi delivered on his election as party general secretary, the composition of the new Politburo Standing Committee and "signals from the highest echelons of power".

The report predicts that the new policies will include liberalisation of financial markets, especially for bonds, interest rate derivatives and foreign exchange, the report says. Interest rate policy would be liberalised away from setting deposit and lending rates to targeting short-term money market rates, while reliance on loans would be cut in favour of equity and bond financing.

Crédit Agricole says foreign exchange policy should be liberalised, with the daily trading band for the yuan gradually widened, at least doubling in size in next year's first half and eventually eliminated, and the capital account increasingly open with the bond market leading the way. Yuan convertibility should be "strongly enhanced" within 10 years, the report says.

Jagdish Bhagwati, an economics professor at Columbia University in New York, said at the Asia Society event that unless China reformed politically, its economy would suffer in the long run.

"China's corruption is pro-growth. China has profit-sharing corruption. All the sons, nephews and nieces are given a straw each for the milkshake," Bhagwati said.

"The Chinese government promises growth because all will benefit, but the Chinese people will not take it. In the longer run, this is going to be a problem."

In his recent speeches, Xi has said that combating corruption is a major priority.

"Authoritarianism means problems are going to rise for China at home and in the world," Bhagwati warned.

"This is a gigantic country that is growing rapidly. It's creating tsunamis all over the world. The Chinese government worries about political dissent. It leads to political volatility.

"Growing political aspirations do not have an outlet in China. That undermines smooth progress. I question whether this is sustainable."

The bank's reports said that recently, a Bank of America Merrill Lynch team attended a meeting in Mount Mogan near Shanghai where 100 Chinese officials, academics and finance professionals were also present.

At the meeting, three areas were deemed high priority: to enforce transparency of budgets and fiscal spending to constrain government officials; legal reforms as the entry point for political reforms; and land reforms to accelerate urbanisation and narrow the urban-rural wealth gap.

"We think two reforms are in the making: abolishing the one-child policy and privatising rural land. The first could be executed from 2013 to 2015, while the second is likely to be carried out after 2015," the report said.

In a report by British think tank Lombard Street Research, chairman Charles Dumas said reform would be difficult for Beijing because the losers from economic rebalancing were likely to be people close to the leadership, given that changes could go against the interests of state-owned monopolies, banks and local governments.

"Without major, painful and unpopular policy changes, China's growth could be stuck at or below 5 per cent, with financial crisis also likely," Dumas warned.