China Economy

China heading for economic downturn, many warn

Economists warn if industrial and social changes are not carried out, decades of unprecedented boom will not continue

PUBLISHED : Thursday, 06 December, 2012, 12:00am
UPDATED : Monday, 30 May, 2016, 5:01pm

The mainland's double-digit economic growth of the past few decades may never be repeated, say an increasing number of economists at home and abroad.

Unless Beijing carries out new economic reforms in key areas, they believe the next pattern of growth will not be so stellar, as the nation begins to lose its traditional advantages of cheap manpower, land and natural resources.

The contentious topic of reform has been hectically discussed in the weeks after the conclusion of the Communist Party's 18th national congress. While reform advocates are keen to see changes after the new government takes office in March next year, many have expressed concerns about the unprecedented resistance to reform.

Issues in most need of attention are uneven income distribution and a flawed social welfare system, discriminatory residency and land policies and the breaking up of state monopolies.

In the first politburo meeting chaired by party chief Xi Jinping on Tuesday, the president-in-waiting said the nation would "further deepen reforms and opening up", "advance reforms in the state-owned sector and rural areas", "actively and carefully pave the way for urbanisation", and "solidly carry out reforms in key areas".

Wu Jinglian, a senior research fellow at the State Council's Development Research Centre, said the party congress put reform back on the agenda. However, "vested interests are increasingly powerful", he said. "It would be hard to push ahead with the reforms if we cannot conquer the obstacles introduced by the interest groups."

Wu did not identify the vested interests but Cheng Siwei, an economist and a former vice-chairman of the National People's Congress, criticised administrative intervention in a financial forum hosted by Caijing magazine last week.

The existence of prevalent administrative approvals creates market unfairness

"The existence of prevalent administrative approvals creates market unfairness," Cheng said. "It is a warm bed for corruption, which partly explains why our construction and transport departments are stricken with graft incidents."

The mainland had seven million civil servants at the end of last year, official data shows. Government jobs are widely regarded as a "golden rice bowl" with attached authority power. The number of government position applicants surged from 30,000 in 2001 to about 1.4 million this year, with the hottest position - an office clerk with the Chongqing statistics bureau - pursued by 9,411 applicants.

Firm resistance to reform is also expected from state-owned enterprises, which are favourably granted with projects and financing and enjoy monopoly in telecommunications, oil, railways and other areas.

"China's equity markets have long been treated as a funding channel for SOEs, with excessive initial public offerings, lack of transparency and a poor track record of dividend payments," said Jing Ulrich, the chairman of global markets, China, at JPMorgan. "For such reasons, most retail investors lack confidence in the market."

State-owned enterprises have cheered the importance given to the sector in President Hu Jintao's keynote speech at the party congress last month, which looks to have ensured their continued dominance in the economy.

Hu said the central government would "unwaveringly consolidate and develop public ownership", help more state-owned capital go to key industries and increase the vitality and influence of the sector.

Shi Jun, a deputy director of the economic committee of the Chinese People's Political Consultative Conference, said: "China's problem is not the excessive monopolies of SOEs, but seriously inadequate control over key industries."

Vice-Premier Li Keqiang said last month that "reforms are China's greatest dividends". In order to reduce resistance by powerful vested interests, he said policymakers needed to focus on redistributing "incremental interests" and "readjusting expectations", with difficult reforms beginning with pilot programmes.

Ha Jiming, a vice-chairman and chief investment strategist of the investment management division, China, at Goldman Sachs, expects Li to emphasise development and expansion in areas that "do not pose a direct or immediate challenge to the vested interests".

"For example, developing capital markets and other direct financing channels to reduce reliance on bank financing, instead of encouraging private investment in the economy to reduce the influence of the existing SOEs instead of directly confronting the SOEs," Ha said. "Gradualism, instead of cold turkey, will be the tone of future reforms."