• Fri
  • Dec 19, 2014
  • Updated: 1:03pm

World Bank sees risks as China rebalances

Forecast of 7.6pc growth for year comes with warning over impact of pressures including action on local-level debts amid slowing trend

PUBLISHED : Saturday, 07 June, 2014, 1:13am
UPDATED : Saturday, 07 June, 2014, 1:36am

The mainland's economic growth is expected to moderate over the next few years as the economy continues to rebalance, the World Bank said in a report yesterday.

The Washington-based lender warned in its latest economic update that the world's second-largest economy was facing rising risks from an abrupt deleveraging of local government debt, a sharp cooling down of the property market and an uncertain export recovery.

"A rebalancing of growth from investment to consumption and from industry to services continues, but there are challenges and rebalancing is slow," the World Bank said.

It expects the mainland economy will grow by 7.6 per cent this year, supported by local policies and global demand recovery, but that the rate of growth may slow to 7.5 per cent next year and 7.4 per cent in 2016.

The International Monetary Fund said on Thursday that the mainland's gross domestic product would grow by 7.5 per cent this year but was expected to fall to around 7 per cent next year.

The central government's economic growth target for this year is 7.5 per cent.

"The prospect of growth falling below the government target will likely trigger accommodative fiscal and monetary policies," the World Bank said.

The central government has launched a series of targeted measures to spur growth, including lowering required reserve ratios at some banks, after first-quarter growth fell below this year's target.

However, Beijing has also pledged not to introduce further huge stimulus campaigns, like the four trillion yuan package implemented during the global financial crisis in 2008 to 2009 that has been blamed for exacerbating the debt problems of local governments.

The report said the mainland economy had shown signs of a pick-up in recent weeks, and that was likely to last for the next two quarters. The improvements had been reflected in robust consumption and recovering external demand.

President Xi Jinping said last month that China needed to adapt to a "new normal" pace of economic expansion. In its 12th five-year plan, covering the years from 2011 to 2015, the central government said it aimed to achieve average economic growth of 7 per cent a year.

World Bank senior economist Karlis Smits said yesterday there were signs the central government might set a lower growth target for next year to help reduce imbalances in the economy.

The World Bank urged Beijing to speed up fiscal and financial sector reforms to deal with the medium-term risks in the economy.

The reforms needed included "effectively managing and supervising rapid credit growth", especially in the shadow banking system, and reducing local government debt that has accumulated through off-budget and quasi-fiscal activities.

"Delays in implementing coherent reforms could perpetuate resource misallocation, undermine the health of the banking system, threaten the debt sustainability of local governments, and increase the fiscal costs of reforms," the bank said.

Reuters, Agence France-Presse


For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive



This article is now closed to comments

'... the world's second-largest economy was facing rising risks from an abrupt deleveraging of local government debt, a sharp cooling down of the property market and an uncertain export recovery.'
Concerning the local government debt, the gradual, formal and further development of the country's municipal bond markets can gradually replace the local governments' need to rely on their financing vehicles to get funds from the informal and precarious Ponzi-scheme-like shadow banking markets.
The problem of maturity mismatch can also be solved once and for all.
Indeed longer-term bonds (100-year or perpetual bonds) can be issued by the local governments in the middle and especially the western regions, considering the relatively slow rate of returns of their infrastructure investment projects.
It is said that China's property market acts as a sponge, constantly absorbing the water coming from the over-issuance of money from the banks.
Maybe this is the reason why China's inflation rate remains at a relatively low level, despite her very high M2/GDP ratio (now more than 2) relative to other countries.
(Chinese readers: ****blog.ifeng.com/article/33137403.html)
The latest data show that China’s exports seems to have recovered recently, perhaps due to the increased external demand coming from the US and Europe, China’s external-trade-supporting policies, and the devaluing yuan.
While private property is sacred and inviolable in the West, this has not been the case in China:
(a) Many cases of right violation happened in the country, as when the local governments purchase private oil fields, mines and enterprises only at low prices.
(b) China’s law still cannot provide reliable protection of property rights.
Right delimitation and resolve of conflicts are usually determined by the relationship between the affected people and the government officials.
Her judiciary is sometimes unable to work independently.
(c) The local governments are participating in the big contest of tax levying and fee collection, or implementation of outdated regulations, and so greatly harassing the enterprises in the process.
(d) So many resources are controlled by the local governments, and so many management regulations are stipulated by them, that the enterprises have no choice but to bargain with them, to obtain the resources they sorely need or simply to survive.
(e) Relatively few long-term plans are made by the relatively rich enterprises because of the atmosphere of anti-rich populism prevailing in the society.
Talk alone is cheap. Procrastination doesn’t pay.
The above problems should be solved as quickly as possible.
According to the investigation of Douglass C. North, the 1993 Economics Nobel Laureate,
Britain became the first industrialised nation in the world, not because her steam-engine technology was more advanced than that of the other countries, but because she was the first nation which had established the system of protecting private property rights.
That effective system stimulated her people to engage in investment and financial innovation.
Hence, the industrial revolution, according to North, is not a technology revolution, but is instead an institution revolution.
The success of the Industrial Revolution and the effective protection of private property rights are closely related --- without the latter, the industrial revolution wouldn’t have occurred, and there wouldn’t have been persistent revolutionised innovations in the subsequent years.
(From ‘China 2013: What Matters Most’)
China's monopolistic SOEs, facing no pressure from competition, have no incentive to innovate.
Even if they have the incentive, and succeed in their innovating efforts, they cannot enjoy the massive fruits of their successes.
It can be safely expected that, in China, most innovations must come from the country’s private enterprises.
But without protection of private property rights, China’s private entrepreneurs, facing an uncertain future, will not make long-term investment plans, and will not spend resources in research and innovation, because they are not sure whether those risky innovative investments can commensurately reward them in the future.
Without reinvigorating her private enterprises, China can hardly transform her economy.
According to statistics , the private enterprises produce one-half of the country’s GDP, employ 70% of the rural migrant workers and 70% of the SOEs’ laid-off employees.
To stabilize the society, they must stabilize the private enterprises, or the problem of unemployment cannot be easily solved.
At the end of the day one must remember - China is still a developing country vs Europe, Japan and America that are developed economies.
The phenomenon of not facing the problems head-on can be said to apply more to Europe than to China.
In Europe, they have now to pay for what they had done in the past.
Some European countries spent lavishly in the past, and ate May's grain in April.
They are facing a massive debt problem, not a problem of their currency, the Euro.
And now they are using more and more stimulative policies to prop up people's confidence in the continent, creating a false impression that everything is under control, hoping to buy more time to solve the problems that they themselves fully know are not easy to solve.
Having left the ICU, the patient is still lying in bed in the hospital.
(Chinese readers: ****finance.sina.com.cn/zl/china/20140607/081219343422.shtml)
You can read the following Chinese article to see how the world's negative interest rate is robbing the poor to feed the rich.
'If eurozone policy assumes that fixing the banks will fix the economy, the next ten years in Europe could look like the 1990s in Japan.'
(From ****www.project-syndicate.org/commentary/adair-turner-warns-that-policymakers--focus-on-credit-supply-constraints-ignores-the-main-impediment-to-growth#wqw9PmQPWpm45wJu.99)
The same can be said about Japan.
Shinzo Abe is yet to fly the third arrow.
Hard to blame him indeed, considering the country's resist-to-change tradition.




SCMP.com Account