Xi Jinping will need courage of his convictions to stay on reform path
With market volatility likely to last for some time, China’s leadership must look to the bigger picture instead of the temporary respite of more stimulus
The roller-coaster ride on the stock market shows no sign of abating. On Tuesday, the Hang Seng index shot up almost 400 points. The Shanghai Composite rose by 3.2 per cent, the biggest single day rise in more than two months. Yesterday, they took back all the gains and then some. Of course, the headline news was all bad or bearish. The difference is that one day, punters thought the official announcement on the mainland of 6.9 per cent GDP growth, the lowest in 25 years, would herald supportive measures from the central government.
But the next day, the markets had second thoughts, no doubt partly influenced by news of a continually weakening Hong Kong dollar on the back of sliding yuan. The dollar drop may soon trigger an intervention by the Hong Kong Monetary Authority to buy and support the currency. That would be the first such operation in a decade. The high volatility looks set to last for some time. It’s worth it to look at the bigger picture.
Beijing could run another stimulus package. That would offer a temporary respite but would merely make things worse down the road. The nation’s economy is still suffering from the previous round of stimulus, from bad debt in state-run companies and banks to industrial overcapacity and corruption.
Belatedly, President Xi Jinping recognises the need for structural reforms and is staying the course with what has come to be called, perhaps not too accurately, supply-side economics.
In essence, it requires efforts to cut government intervention in the markets, lower barriers on the production of goods and services, and cut taxes. The aim is to raise efficiency of labour, capital and land use, upgrade technology and human capital, and nurture entrepreneurship and innovation. In effect, this will hopefully loosen regulations and reduce state power over the economy while encouraging market competition.
A Xinhua report of a phone conversation between Xi’s top aide Liu He and US treasury chief Jacob Lew said the president was intent on pushing through the reforms. That was the message given to the Americans, who have demanded greater clarity about Beijing’s economic policy intentions.
This year marks the first of the 13th Five-Year Plan. It will be a challenging launch given the slowdown. But to keep a perspective, 6.9 per cent growth is something to dream about for most economies. So long as the jobless rate remains manageable, there is room for Xi to push through reforms. But the president will need the courage of his convictions.