Economic reforms are crucial if China is to meet its growth target

There is little doubt about China’s capacity to meet its economic growth target of 6.5 to 7 per cent this year and a minimum of 6.5 per cent a year until 2020, declared in Premier Li Keqiang’s (李克強) address to the annual session of the National People’s Congress. Whether that alone fulfils the vision of creating a “moderately prosperous society” remains to be seen. The issue is not the number but how the authorities meet the target year by year – whether they undertake the economic restructuring needed to make the growth sustainable and rein in a worrying debt spiral in the economy.

This year they made the right noises but a modest start. The emphasis remains on stabilising faltering growth, while trying to avoid a blowout in debt and asset bubbles. That is reflected in a budgeted fiscal deficit of 3 per cent of GDP or 2.18 trillion yuan (HK$2.6 trillion) to ensure a “reasonable range” of growth, compared with a deficit of 2.4 per cent last year. The GDP growth target shows expansion is still the priority, despite the overriding aim of striking a balance between short-term stimulus and structural reform.

China may be able to meet a 6.5 per cent growth rate for the next five years simply because it can, but it could come at a huge cost to sustainable growth if the Communist Party fails to rise to the challenge of reform in the face of opposition from vested interests within and outside its ranks.

The government needs to set its sights at longer than five years. The direction Li laid out in his report to the NPC is largely sensible although it needs to be developed a lot more. Money is being spent on tax changes to leave companies with more money for investment. About 100 billion yuan will be spent over the next two years to reform “zombie” state-owned enterprises unable to make profits – mainly on resettling displaced workers, a much harder task now than in the past when the economy was growing strongly. Officials are counting on technology and innovation to help create millions of new urban jobs. That calls for changes in the tax system to encourage the private sector to spend more on research and development, which in turn calls for reform of the legal system to better protect patents and intellectual property rights.

The targets set out in Li’s report to the NPC may be achievable, but the issue of how they are going to be achieved is paramount. The old conventional ways of splashing money are no longer sustainable. The need to undertake painful reform to taxation and the government and legal environment for the private sector is more pressing than ever.