Reform, not growth, is key to China's future, says Nobel laureate Michael Spence
Nobel laureate says revamping the mainland's state-owned enterprises is more important to development than meeting monthly data figures
Reform of China's state-owned enterprises sector is more important to economic development than maintaining a target level of GDP growth or the risk of an investment bubble forming, Nobel laureate Michael Spence told the South China Morning Post.
Without reform China cannot raise returns on capital, enhance industrial efficiency or unlock the sustainable, consumer-driven growth that Beijing says is needed to replace an investment-driven, export-oriented model of the past three decades that is running out of steam.
"When I look at China, to the extent that the data permits it, I look at the shifting structure of the economy and to the extent that one can do this from a distance sometimes, to look at the reforms that seem to me to be the critical underpinnings to support the structural transformation. At least on a short-term horizon, that is more important than the growth," Spence said.
Investors have become increasingly obsessed with trying to pinpoint China's bottom line for economic growth in order to gauge whether a wave of stimulus might be unleashed to maintain a level of job creation that analysts broadly believe underpins the official growth target.
China reported last month that gross domestic product growth slowed to an 18-month low of 7.4 per cent year on year in the first quarter, just missing the government target of 7.5 per cent.
The State Council had announced a clutch of tax breaks and infrastructure spending two weeks before the release of the data, leading markets to declare it a "mini-stimulus" and intensifying speculation about a fresh round of investment spending.
Large-scale spending would clearly prop up growth in the near term, but it would also add to what the International Monetary Fund and others already believe is a dangerous imbalance towards investment in the Chinese economy.
Investment spending in China is a far bigger proportion than that typical in developed economies while consumption's share of activity languishes far below, fuelling fears that Beijing is creating a massive stock of unproductive assets that create inefficiencies for the long term.
But Spence - one of a tiny handful of economists with genuine insight to offer about China's economic reform efforts, after being invited by Beijing to help form an external group of outside advisers to aid the government's top planners - cautions about paying too much attention to monthly data blips.
"To be optimistic or pessimistic, one has to assess not only what is going on with the reform programme to the extent it has been disclosed, but to make an assessment of the seriousness of the commitment, the political will to get it done, and an assessment of the opposing forces to the extent that they are there. And they are there in every society - China is not unique in having vested interests."
Failing to deliver competition would stymie the growth of a consumption-oriented middle class and indicated that vested interests had succeeded in fending off change vital to the long-term health of the economy, Spence said, speaking on the sidelines of a development seminar organised by the Fung Global Institute, which he advises.
"If nothing has happened in five years, then they are stalling for a reason, and it is probably that the interests surrounding state-owned enterprises are powerful and they [the government] aren't getting it done, or they don't want to fight the battle - and that's a bad sign."
Spence - a world authority on growth in developing nations and how they can successfully navigate the so-called middle-income trap, or transition, as he calls it, to become high-income, developed economies - remains optimistic, despite the numerous challenges ahead.
While shadow banking, inefficient state-driven investment and energy subsidies are clear impediments to success for China's economic transition, Spence says there is more going right than not.
"They are not, by and large, protecting the labour-intensive export industries that are under pressure. They are going to let that process run. They are not using the exchange rate mechanism, or subsidies to try to keep these people in business too long. They are not interfering with rapidly rising wages - in fact they are encouraging it," he said.
"The folks up in Beijing have a huge armament with which to sustain growth and which they are diligently not using when it interferes with shifting growth patterns."