China seeks stable, long-term growth over artificially boosting demand

China has adopted different policies from those in the past to address its current economic predicament. At last week's G20 leaders' summit, President Xi Jinping said the nation must advance structural reforms to solve the problems hindering long-term economic development, even though that might mean slower growth.

This shows that policymakers are determined to maintain stable growth while focusing on adjusting the structure of the economy. Beijing is not about to roll out another massive stimulus package and the rest of the world should not have unrealistic hopes that China will remain the locomotive of the global economy.

Recovery in the West has been slow amid economic uncertainties such as sovereign debt levels and unemployment rates. Since May, emerging economies have been plagued by problems from capital outflows, including sharp currency depreciation, rising inflation and lacklustre exports. Thoughts have turned to whether it is necessary to roll out a new round of stimulus measures to halt the slide.

Under such circumstances, the whole world has turned to China, the world's second-largest economy. It should be remembered that, following the collapse of Lehman Brothers in 2008, the State Council proposed a 4 trillion yuan (HK$4.5 trillion at the time) stimulus package on November 5 that year.

This was seen as a "big gift" for the G20 summit held just nine days later. Since then, the world has had high hopes for G20 gatherings. In the two subsequent years, the Chinese economy contributed more than 40 per cent to global economic growth. Resource-rich countries, such as Brazil, Australia and Indonesia, weathered the worst of the crisis by exporting goods to China. Consequently, some foreign political heavyweights have been unhappy of late because China has yet to launch a similar stimulus plan. Some foreign media have even criticised China for being selfish.

Xi's clarification at last week's G20 summit may have dashed some hopes, but it was a wise move. It shows the world that Chinese policymakers are rational and understand fully the structural causes of slowing growth, as well as the effects and limitations of policy tools.

If China were to roll out any new stimulus, it would first have to ask a few questions. What is the economic situation at home and abroad? Without a stimulus, how would its economy perform? What are the benefits and costs of such a plan?

The International Monetary Fund predicts that China's economy will grow 7.75 per cent this year and 7.7 per cent next year. Those figures may be lower than in the past, but they will still be the envy of many troubled nations.

It is easy to see why, when the financial crisis struck, some governments overthought the situation and introduced excessive measures. Indeed, the negative effects of such policies are with us now. So it would seem unwise to introduce more stimulus measures.

Inevitably, China's growth will slow in the medium and long term. Blindly seeking to artificially boost demand, to achieve double-digital growth, can only harm the economy. As Xi said, a development plan that seeks only immediate gain while disregarding people's hardships will not last long.

This should be a reminder not only to Chinese officials with an unquenchable thirst for growth; it should also dispel others' wishful thinking about more stimulus plans.

China's contribution to the global economy will be in its steady growth and structural transformation; only long-term reforms can sow the seeds of prosperity. Measures adopted in times of economic emergency - which go against market rules - can be effective in the short term but they have long-term disadvantages.

Some nations have made this mistake: political issues can affect economic decisions. Rulers are often unwilling to offend vested interests, yet they have to adopt populist policies to remain in power. This means they cannot tackle one problem without aggravating another.

Examples include Indonesia, whose economic structure is hampered by the monopoly of state-owned enterprises in the energy, manufacturing and agricultural sectors, and the strict controls imposed on prices of food, fuel and electricity.

India's economic problems lie in the ill-defined functions of government and the market. Less than 5 per cent of the population pays personal income tax, land reforms have failed and restrictions are imposed on entry to coal, rail and other industries. Recently, the government introduced a massive food-rationing programme. No wonder the economy is in turmoil.

While better policy co-ordination is important during international forums, it is equally vital for major economies to handle their own business first.

For China, this means implementing comprehensive reforms in response to slowing growth and a potentially painful transition. In this way, a repeat of the economic dramas that fill history books can be avoided.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caixin.com