China’s state agencies struggle to coordinate policies in bid to boost slowing growth
A lack of clear direction has led to squabbles between key market players
A war of words has erupted in recent weeks in Beijing as key economic ministries point the finger at each other for not doing a good job as the country’s economy worsens.
The country’s powerful economic planning agency said on Tuesday that the central bank was creating too much liquidity while channelling little into real economic activities, after China published weak July credit data.
Only a few weeks earlier, the agency publicly had urged the central bank to cut interest rates and the deposit reserve ratio, but it withdrew that proposal after wild market swings.
The central bank defended itself, saying it has done sufficiently well, and Sheng Songcheng, the statistics chief for the People’s Bank of China, recently urged China’s finance ministry to loosen its wallet strings and beef up fiscal deficits – a move the finance ministry is very cautious of.
China’s finance ministry, in turn, warned about financial risks and made it clear that any bailout of financial institutions wouldn’t come easily.
These verbal spars between the National Development Reform Commission, the Ministry of Finance and the PBOC, which is part of the government in China, serve as fresh examples of policy coordination difficulties when Beijing is at a key stage of trying to transform its economy to a more sustainable mode.
“In an economy as big as China, policy coordination among different ministries is vital,” said Shen Jianguang, chief Asia economist at Mizuho Securities in Hong Kong. “There are always policy conflicts in China. They are just not so prominent when the economic situation is sound.”
Turf wars are nothing new in Beijing. PBOC governor Zhou Xiaochuan once publicly attacked the NDRC for managing China’s enterprise bond market with a planned-economy mindset, and China’s onshore bond market, namely the interbank market, expanded under the central bank’s oversight. When the central bank permitted the steady appreciation of the yuan, China’s trade ministry complained loudly about the possible impacts on exporters from a more expensive yuan.
Such differences sometimes proved healthy, or even necessary, to form workable policies. But infighting can be harmful when there’s no clear direction from the top.
Beijing has set ambitious but conflicting targets: it wants to ensure the economy rises at least 6.5 per cent this year while reducing leverage and downsizing industrial capacity; it wants zombie companies to go bust but doesn’t want to see lay-offs; and it pledges to give market “a decisive role” in resource allocation but retains a strong and visible hand in economic activities.
The results are slowed headline economic growth, weaker private investment and an increasingly dangerous debt burden. Economic indicators for July showed the majority of new loans were mortgages for home purchases.
The lack of harmony at the top level may lead to ministries quarrelling over economic policies, said a Chinese economist based in Beijing who declined to be identified. “It could also show Beijing’s policy priorities for this year and the next are not economic but political.”
A power reshuffle will take place at the 19th Communist Party Congress in autumn of next year, and the jockeying for position could impede or postpone necessary major decision-making.
“Deleveraging is unlikely as it will lead to a dramatic fall in growth,” the economist said. “Nobody dares to risk the consequences. Authorities are hiding from taking responsibilities.”
Domestic economic policy coordination is undoubtedly a challenge for other economies as well, with the United States, the European Union and Japan all trying different policy mixes to kick-start growth.
Mizuho’s Shen said economies around the world rely too much on monetary policies but structural reform is also inevitable.
China’s finance ministry data showed a quicker pace of fiscal expenditure in recent months, while the central bank data showed big increases in fiscal deposits.
“It indicated the low efficiency of local governments using fiscal funds, and that may indicate improvement is needed in policy coordination from higher level of government,” said Chen Xingdong, the chief China economist with BNP Paribas in Beijing.
“The policy targets aren’t clear, and there are difficulties in choosing the priority between ensuring growth and pressing ahead with reforms,” Chen said.