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ECONOMY

Xi Jinping takes charge of China's economic reforms

President takes charge of the mainland's economic reforms, a task that had been the responsibility of the premier

PUBLISHED : Monday, 16 June, 2014, 3:07am
UPDATED : Monday, 16 June, 2014, 7:31am

China observers are having to get up to speed with the "new normal" now required of their divining of the nation's policymaking.

The term, aired by President Xi Jinping last month, was originally aimed at reminding people of the transitional phase that the economy has entered, marked by a slower pace of expansion and structural reforms. But the term has gained added significance with its attachment to the president himself and the marking out of a greater role by the top Communist Party leader in the economic sphere - usually the policy domain of the premier.

Xi has now indicated he is the man to set the economic agenda for the country, although political needs may deeply influence or even override planned reforms.

The president is becoming much more visible than Premier Li [Keqiang]
Richard Harris, consultant

On Friday, Xinhua reported on a meeting chaired by Xi that discussed a grand plan for securing the country's future energy demands. For the first time, Xi was mentioned as head of a powerful leading panel that oversees financial and economic affairs, a position that had usually been held by premiers.

Government researchers told the South China Morning Post they were not surprised by the development, given that Xi already heads a newly created panel with the final say on overall social and economic reforms.

Xi is not the first top leader to become heavily involved in economic issues, but he is perhaps emerging as the most activist leader on this front since the late Deng Xiaoping drafted the path for the opening up of markets in the 1970s.

"The president is becoming much more visible than Premier Li [Keqiang]," said Richard Harris, the chief executive of consultancy Port Shelter Investment Management.

Harris wrote on so-called Likonomics in July last year, when he forecast Li might become a strong "change leader", with shades of prominent Western economic reformers such as Ronald Reagan of the United States or Britain's Margaret Thatcher. Harris has since reviewed this assessment after seeing some of the reforms pledged by Li fall short of expectations.

Some experts have shared the frustration, citing lacklustre consumption, slow progress in financial liberalisation and persistent state dominance.

A continued slowdown in economic growth, to an 18-month low of 7.4 per cent in the first quarter, also exacerbated doubts over the effectiveness of Li's policies.

"The Likonomics reform has been put in a holding pattern," Harris said.

The top leadership was likely to "get political issues right first" while keeping the economy in a "weak and stable condition".

He expects stability will feature high in Xi's thinking - or "Xiconomics" - under which anti-corruption, administration reform and regional security issues take priority, even though these steps in the near term may hurt the shift towards a more consumption-led economy.

But He Keng, a former vice-chairman of the Financial and Economic Committee of the National People's Congress, said he was confident in Xi's ability to tackle economic problems. "I'm sure he has a very good understanding of China's economy," he said.

In the past year, Xi broached ambitious Silk Road plans in a bid to develop the country's region - with road and sea connections - as part of an effort to shore up strategic and trade links with the rest of Asia as well as some countries in Europe, such as Russia.

Xi has also sought to explore new growth momentum through the formation of economic belts such as the Beijing-Tianjin-Hebei zone, which aims to fix imbalances in resource allocation among the three regions.

Sources familiar with the matter said earlier Xi last year ordered a rewrite on a draft of China's urbanisation blueprint that had originally been overseen by Li.

The final version came out with less emphasis on heavy investment and more attention on people's livelihoods and narrowing the urban-rural income gap, they said.

The reweighting was motivated in part by concerns to avoid a repeat of the old model of growth that had fuelled high inflation and bad debt at local governments, they said.

Xi had gained exposure to grass-roots problems when he spent years in a rural part of Shaanxi province. He also accelerated growth in Zhejiang when he headed the affluent province by upgrading the local industries and boosting its per capita gross domestic product to among the highest in the country.

Most researchers, however, do not see fundamental disparities between Xi and Li's thinking, saying they are both reform-oriented. Having Xi, who is familiar with economic development, as the chief architect of China's reform, may boost the efficiency of decision making, they say.

Some analysts say Li, the No2 in the political hierarchy with a doctorate in economics from the elite Peking University, should be credited with moving the economy on the right track as part of rebalancing efforts, although they note the effect of these policies may only be felt years later.

Huang Yiping, a professor at Peking University who coined the Likonomics term while at Barclays Capital last year, said the three pillars of the ideology he pointed to a year ago remained true today: no major stimulus, deleveraging and structural reforms.

Stephen Roach, a Yale University professor and former chairman of Morgan Stanley Asia, said Li's mini-stimulus should be successful "in tempering the cyclical pressures while allowing China to stay the course of its structural reforms".

"This is a key underpinning of China's rebalancing strategy and Premier Li deserves credit for pulling it off," Roach said.

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singleline
You can also read the following Chinese article:
****finance.sina.com.cn/zl/china/20140610/090719364505.shtml
singleline
In the coming 20 years, China’s 800 million farmers should settle in the cities.
Instead, the present arrangement only allows 100 million to do so in the coming 7 years (up until 2020).
How can they solve the problem of excess capacity through urbanization ?
With 800 million people going into the cities, a total of 400 trillion yuan of investment can be increased, for an average increase of 20 trillion yuan for each of the coming 20 years.
If so, there is no problem in sustaining an average annual growth rate of 9% within this period.
But with only 100 million people within 7 years, the growth rate will be less than 7%.
Also, the income differential between the rural and city residents is more than 3 times.
Through urbanization, a large group of high-income residents can be cultivated.
This facilitates the process of rebalancing the economy toward one propelled mainly by domestic consumption.
The present arguments center on the necessity of no stimulus, mini-stimulus or strong stimulus, but the problem of rural-urban gap and income distribution cannot be solved by traditional expansionary monetary or fiscal policies,
instead massive adjustments and reforms are needed.
(Chinese readers: ****finance.sina.com.cn/zl/china/20140615/150419416442.shtml)
singleline
'Laying the foundations of a sustained recovery requires measures to strengthen public- and private-sector balance sheets, together with structural reforms aimed at raising productivity and improving growth potential.
More stimulus may boost output in the short run, but it can also exacerbate the problem, thus compelling even larger dosages over time.
An unhealthy dependence on painkillers can be avoided, but only if we recognize the risk in time.'
(****www.project-syndicate.org/commentary/claudio-borio-and-piti-disyatat-reconsider-the-link-between-ultra-low-real-interest-rates-and-saving-and-investment-fundamentals#sKhA4l82JQoKYkVo.99)
singleline
I hope you know what a ‘production-possibility frontier’ in economics is,
this perhaps is the most convenient tool to investigate the situation China is in right now, and to determine the correct solutions.
(****en.wikipedia.org/wiki/Production%E2%80%93possibility_frontier)
Please refer to the first graph in the above article.
Now China is at point X, not A.
Only at point A should China use expansionary monetary or fiscal policy to go back to the efficient boundary.
Now, being at X, China should go back to the boundary by eliminating the useless excess capacities.
If, at X, further expansionary Keynesian policies are used, the net effect will ultimately be to prop up the asset prices (like those in the property market, and perhaps the stock market as well), encouraging more hot-money capital inflow, without increasing the real output.
(In the US, being at A, expansionary monetary policies, in the form of 4 rounds of QEs, fail to move the economy quickly back to the boundary.
Instead, it seems to result in an overheated stock market which may pop one day, particularly when the interest rate later rises to a higher level.)
singleline
You may have heard of the idiom that a dog is barking up the wrong tree, with nothing up there.
Arguably the same is happening in China right now.
The problem facing China at present is not a lack of credit, but an excess of capacity.
In the short run, to sustain the country's short-term GDP growth rate (short-term only, not sustainable long-term growth rate which should be our real concern),
what’s needed in China at the present time is expansionary fiscal policy, in the form of tax cuts, to prop up the country’s consumption expenditure, private investment expenditure and domestic exports,
not expansionary monetary policy, in the form of targeted RRR cut.
(Chinese readers: ****finance.sina.com.cn/zl/bank/20140603/084819297067.shtml)
Government budget deficits (or smaller surpluses) should be used to offset the excess private savings to prevent the GDP from falling.
This solution in itself is not very healthy, but it serves as a short-term expedient measure.
The long-term healthy and sustainable way to maintain a high economic growth rate is to increase the productivity of the country's factors of production, like labour productivity.
(This means the whole production-possibility frontier moves outward.)
singleline
Now in China, the importance of supply management may outweigh that of demand management, as is argued in the section '慎用需求管理加强供给管理' of the following Chinese article:
****magazine.caixin.com/2013-06-20/100543811_all.html#page2
singleline
You can also read the following Chinese article:
****comments.caijing.com.cn/2014-06-16/114266502.html
 
 
 
 
 

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