Speedy reforms key for China's economy

Second-quarter growth from mini-stimulus policy brings surprise but analysts say Beijing must implement long-term economic measures

PUBLISHED : Thursday, 17 July, 2014, 1:22am
UPDATED : Thursday, 17 July, 2014, 5:04am

Beijing's mini-stimulus policy has revived the mainland economy, but observers say it may only cure the near-term pains.

The central government needs to stay wary of risks the economy may slip into a faster deceleration cycle on cooling housing starts or shrinking export demand, they say, adding that the only long-term solution is to speed up reform.

The mainland's gross domestic product expanded by 7.5 per cent in the second quarter, a tad faster than the 18-month low of 7.4 per cent achieved in the first. Even the slight pickup exceeded many economists' expectations, showing the surprisingly quick effect of the fine-tuning measures rolled out since May.

"We believe the rebound was mainly driven by the government's stimulus measures focusing on increasing spending in infrastructure [especially railways] and social housing," Bank of America Merrill Lynch economists said in a research note.

Railway fixed-asset investment growth soared to 32.1 per cent year on year last month from just 7.5 per cent in May, offsetting slowing property investment.

That raises a key question - must the mini-stimulus policy remain in place in order to prevent GDP growth falling short of the annual target for the first time in decades?

Most analysts say yes, given Beijing's repeated statements about the seriousness of meeting the target of about 7.5 per cent this year, and strong headwinds such as the anti-corruption fight that have curbed spending and the faltering property sector.

But policies such as those accelerating fiscal spending may be a double-edged sword, analysts say, with the reliance on stimulus to rejuvenate the economy underscoring the risks that more crucial reforms designed to boost long-term productivity may be delayed.

Analysts called on Beijing to make a more decisive push towards reforms, including boosting innovation, cutting state enterprises' dominance, and broadening financing channels.

"China's problem in its core is private investment has disappeared," said Credit Suisse chief regional economist Dong Tao. "So the solution has to be re-engaging private investment, instead of the government taking over the investment job.

"I am, however, not naive about the influence of vested interest groups. Eventually, maybe half the initiatives pledged at the [Communist Party's] third plenary session could be executed, but that would still make things look different five years later."

Private enterprises' returns have persistently exceeded those of state-owned enterprises for more than a decade, with the gap widening since the 2008 global financial crisis, when easy credit fuelled massive investment in state-run projects that lowered efficiency.

In a sign that SOE reform was pushing ahead, the State-owned Assets Supervision and Administration Commission announced on Tuesday that six firms had been selected for pilot trials, including transformation into state capital investment companies and mixed-ownership experiments. That involves reforming Sasac's role to have it focus more on the use of capital, instead of intervening heavily in companies' asset allocations and other operational details.

Wen Zongyu, the director of the state-owned economy bureau at the Ministry of Finance's Institute of Fiscal Science, welcomed the progress but said the government still lacked sufficient sincerity in tackling deep-rooted vested interests in the state-dominated oil, telecommunications and power sectors.

Moody's economist Alaistair Chan said gradual reforms were likely to continue in the second half of the year, adding that they would "only affect growth over the medium to long term".

At a meeting with corporate sector leaders on Monday, Premier Li Keqiang vowed to streamline government functions, widen access for private capital and protect intellectual property rights.

The mainland's high-technology industry expanded 12.4 per cent in the first half, exceeding the average industrial output growth of 8.8 per cent.

But Wen said the mainland still had a huge gap to make up in terms of exporting hi-tech products such as automatic equipment to meet surging global demand, underscoring the need for faster industrial upgrading.

In the world's most popular hi-tech areas, such as smartphones and chips, the mainland remained a net importer, he said.