China leaders play safe on reforms as economic growth sags
For all the strong rhetoric, China’s latest policy actions suggest a shift in focus on the economy to mix relatively pain-free reforms that burnish Beijing’s credentials for change with measures to prop up sagging growth.
While Premier Li Keqiang provides a drip-feed of easy reforms, he will avoid more radical moves for fear of tipping the world’s second-biggest economy over the edge.
Analysts from top government think-tanks say there is no reason to doubt the government’s commitment to rebalancing China’s economy away from an investment- and credit-driven growth model to one that relies more on consumption and innovation.
But the leaders are aware they are walking a fine line and the economy’s weaker-than-expected performance this year has underlined the need to tread carefully. Reform may well secure future growth, but if they push too hard now they could cause an economic shock that forces Beijing to resort to old-school pump-priming, prolonging the very economic model they are trying to dismantle.
“The government has to safeguard its bottom line in growth, while restructuring the economy. It’s very difficult to balance,” said He Qiang, an economist at the Central University of Finance and Economics in Beijing and an adviser to parliament.
“Economic restructuring cannot be achieved overnight and it should be a gradual reform, not a revolution.”
Since President Xi Jinping and Li were appointed in March to lead China they have pressed the reform message to wean the country off a diet of breakneck expansion and easy credit that fuelled double-digit growth for three decades and catapulted China to the top table of global economies.
Just last week Xi was quoted by the official Xinhua news agency on the need “to deepen reforms in all aspects” although he also acknowledged the line between “being courageous and walking steadily”.
In a nod to growth concerns, Beijing has unveiled a series of small steps in recent weeks that analysts say are geared to providing quick help to the economy.
Last week, Beijing said it will scrap tax for six million small businesses, speed up railway investment and offer more help to exporters.
That means radical reforms, such as full interest rate liberalisation, are off the table for now although they may be tackled in October, when the Communist Party holds a key meeting that will set its economic agenda for the next decade and which may also include some political reform.
Until then authorities will reach for low-hanging fruit: uncontroversial reforms that move in the right direction and could have some, even if only modest, impact on growth, but which are limited in scope and ambition.
The central bank’s decision earlier this month to remove the floor on bank lending rates is an example. It was welcomed as a largely symbolic prelude to removing caps on deposit rates, a much more difficult task that will take time.
The central bank says a deposit insurance scheme and other preparations are needed before a move on deposits and economists said besides concerns it would squeeze banks’ profits there is also concern about its near-term economic impact.
“They dare not to liberalise deposit rates now as that could push up borrowing costs,” said Liang Youcai, an economist at State Information Centre, a government think-tank. The working assumption is that lending rates would rise to pay for the higher cost of deposits.
China’s leaders have said a slowdown in economic growth is needed in order for reforms to take place since they will be targeting areas, such as rampant investment in infrastructure and factories that is still the main driver of expansion. That’s why they cut the 2013 economic growth target to 7.5 per cent from 8.0 per cent.
But the 7.5 per cent annual growth of the second quarter marked the ninth slowdown in the last 10 quarters and also shows the economy is cutting close to the bone of the government’s this year growth target.
Economists familiar with policymakers’ thinking though say that splashing out on big infrastructure projects now in the way China did during the global financial crisis is out of question.
Part of pressures on the economy stems from reforms already carried out, efforts to curb production by the worst polluters and sectors plagued by overcapacity. Big-scale stimulus would mean backpedalling on those efforts.
While keeping the door shut for big stimulus, the government has unveiled plans to step up spending in several carefully selected areas - social housing, urban infrastructure, high-speed rail.
Analysts believe there is room for the government to support growth further, such as more subsidies for consumers, spending on public hospitals and nursing homes for the elderly.
Ultimately, the government wants to avoid a miscalculation where growth slips too far too quickly as it pushed forward with reforms, causing a sudden rise in unemployment and the potential for social unrest.
Equally though, there is potential risk if the government is too gradual in its reform approach, allowing economic and financial imbalances to build up too far, says Wei Yao, China economist at Societe Generale in Hong Kong.
“At some point all these legacy issues such as the credit risk are going to explode,” she said.
Going forward, the key date to watch for is October, when the third plenum is held of the 18th Central Committee of the Communist Party of China. Third plenums have been a springboard for key changes in China in the past, including the sweeping economic reforms of the 1990s spearheaded by former Premier Zhu Rongji.
Analysts expect the committee, presided over by Xi, to hammer out a more systematic road map for reform.
“The direction of reform is clear. There are no differences on whether we need reforms, but the key question is how to implement them,” said Zhang Bin, an economist at the Chinese Academy of Social Sciences, a top government think-tank in Beijing.
“What we see so far is a random pattern in reforms – or reforms that face limited resistance,” he said.
Top of the government’s to-do list is land reform to ease restrictions on farmers’ right to own land and relaxing its rigid household registration system. The idea is that such reforms will make it easier for migrant workers to settle in cities, paving the way for a grander long-term plan to draw more rural Chinese into urban areas.
A fiscal and tax overhaul is also needed to wean local governments off their heavy reliance on land sales and borrowing for income, which has led to a splurge of building and high local government debt.
In contrast, Beijing will not rush into full yuan convertibility – a part of its push to make it a global currency – by dismantling capital controls at a time when volatile capital flows in emerging markets are raising concerns about economic stability.
The outcome is still likely to represent a balancing act on the part of the government as it seeks to maintain healthy growth while forcing through changes in the main drivers of that growth, analysts said.