China risks hobbling its economic development with too many policy goals

Stephen Roach says China's economic planners need to prune and prioritise their myriad policy objectives so the country can move with purpose towards the goal of structural rebalancing

PUBLISHED : Monday, 06 January, 2014, 3:28am
UPDATED : Thursday, 30 March, 2017, 3:19pm

China was hardly lacking in policy pronouncements in the final months of 2013. From the 60-point reform programme issued by the Central Committee's third plenum in early November to the six core tasks endorsed by the Central Economic Work Conference a month later, China's leaders proposed a raft of new measures to address the nation's daunting challenges.

But, seen in their entirety, the risk of incoherence has become evident. The third plenum initiatives, for example, have a strategic focus: promoting the economy's long-awaited pro-consumption structural rebalancing. While the work conference's core tasks embody the spirit of these reforms, they also reflect a tactical focus: "keeping growth steady". Given the likely trade-offs between strategy and tactics - that is, between long-term reforms and short-term growth imperatives - can Chinese policymakers really accomplish all their objectives?

Of course, such trade-offs have long been evident in most economies - developed and developing alike. What has separated China from the pack has been its strong inclination to place greater emphasis on strategic objectives in charting its path of economic development.

Even so, new tensions between the third plenum's policies and those of the latest work conference have raised the question of trade-offs once again. The consumer- and services-led rebalancing initially proposed in the 12th five-year plan and endorsed by the third plenum implies slower gross domestic product growth than the 10 per cent average annual rate recorded from 1980 to 2010.

Yet slower growth need not be a bad thing. Employment in services is about 30 per cent higher per unit of output than in the manufacturing and construction sectors, which means that an increasingly services-led China can accomplish its critical labour-absorption objectives - namely, rapid job creation and poverty reduction - with 7-8 per cent annual growth. For China, rebalancing and slower growth go hand in hand - and yield the additional benefits of less intensive resource demand, a more subdued rise in energy consumption and related progress in addressing environmental pollution and income inequality. But the recent work conference failed to consider China's growth slowdown in this strategic context, placing considerable weight instead on the macro-stabilisation imperatives of "proactive fiscal and prudent monetary policies".

Since the work conference was concluded, investors have been debating the 2014 growth target. Will the 7.5 per cent objective set for 2013 be maintained, as a recent leak from senior Chinese officials seems to indicate, or do the recent pronouncements indicate further deceleration towards 7 per cent?

The answer will be revealed at the National People's Congress in March. But focusing on a near-term growth target, and fine-tuning fiscal and monetary policies in order to achieve it - to say nothing of yet another credit crunch roiling Chinese short-term funding markets - detract from the emphasis on strategic shifts that economic rebalancing now requires.

Indeed, most of the six major economic tasks for 2014 set by the work conference - including efforts aimed at ensuring food security, containing local-government debt, and improving co-ordination of regional development - have little or nothing to do with China's strategic rebalancing imperatives. Though laudable, they seem disconnected from pro-consumption restructuring.

In fact, only two of the six tasks fit neatly with the third plenum's strategic agenda: the call for enhanced social security is consistent with the third plenum's proposal to allocate 30 per cent of state-owned enterprises' profits to fund safety-net programmes such as pensions and health care. Likewise, and the emphasis on markets' "decisive role" in upgrading China's industrial structure and eliminating excess capacity is compatible with the plenum's goal of achieving a market-based shift to a consumer society.

But what emerges from all of this is yet another example of the time-worn "kitchen sink" approach to Chinese economic policymaking - countless proposals, initiatives and goals that are loosely connected at best, and that are often plagued by internal inconsistencies. A new approach is needed, and it will require three key changes to China's economic policy framework.

First, in keeping with global best practice, Chinese authorities need to be far more explicit (that is, transparent) in prioritising, or ranking, their policy objectives. Setting different agendas on multiple platforms is a recipe for confusion and potential conflict.

Second, economy-wide growth targets should be downplayed. Such targets smack of the legacy of a state-directed economy - a legacy that runs counter to policymakers' new emphasis on the "decisive role" of markets.

Finally, there is a need to separate stabilisation objectives from strategic imperatives. The former should be handled by an independent central bank with primary responsibility for monetary and currency policies, whereas the latter should be the responsibility of the new central leading group on reform.

Chinese policymakers' traditional emphasis on long-term strategy has enabled them to steer past the inevitable bumps on the road to economic development. Now, however, as the authorities set out on a new course aimed at sustaining China's extraordinary progress, they should act quickly to achieve greater coherence in their policy agenda.

Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of the forthcoming book, Unbalanced: The Codependency of America and China. Copyright: Project Syndicate