By cutting interest rates, China puts its foot down on slower growth
Stephen Roach says cyclical disruption is viewed as a threat to reform
In economic policy, as in most other areas, actions speak louder than words. By cutting its benchmark policy interest rates, the People's Bank of China has underscored the focus of the government's stabilisation policy, which aims to put a floor of around 7 per cent on gross domestic product growth.
Achieving this will be no small feat. China's economy is facing structural headwinds arising from the shift to a new model of services- and consumer-led growth, and cyclical pressure, as a tough global environment puts pressure on the old export and investment-led model.
The cyclical challenges, in particular, are proving to be more severe than anticipated. Though exports have declined from their pre-crisis peak of 35 per cent of GDP, they continue to account for about 24 per cent, leaving China exposed to the global growth cycle.
Given that development strategies begin to fail when economies reach middle-income status - a threshold that China is rapidly approaching - China cannot afford to allow mounting cyclical risks to undermine its structural transformation.
The fact is that only structural transformation can lift a middle-income developing country to high-income developed status. Fortunately, China's leaders recognise this, and are committed to achieving it.
President Xi Jinping has been spearheading the effort to press ahead with reform and rebalancing. But the risk of cyclical disruptions, such as an unexpected decline in global economic growth, remains. This raises an important tactical challenge for China. How can it stay the reform course without suffering a significant growth slowdown in the short term?