Stay­ing the course on struc­tural re­forms

China Daily (Canada) - - COMMENT -

China’s ef­fort to re­bal­ance its econ­omy— tran­si­tion­ing from in­vest­ment- to con­sump­tion­based growth, re­duc­ing air pol­lu­tion and im­prov­ing so­cial ser­vices— has in­evitably led to a “newnor­mal” of slow­ing growth. While it is tempt­ing to fo­cus on short-term growth tar­gets, Chi­nese pol­i­cy­mak­ers may want to con­sider the ben­e­fits of stay­ing the course on struc­tural re­forms, which could help the coun­try sus­tain ro­bust eco­nomic growth in the long run.

In re­cent years, China has car­ried out poli­cies that have put the econ­omy on a more sus­tain­able foot­ing at an im­pres­sive pace. The gov­ern­ment, for ex­am­ple, has taken steps to rein in credit growth, en­acted en­vi­ron­men­tal leg­is­la­tion and re­duced ex­cess ca­pac­ity in the econ­omy. Th­ese mea­sures have mod­er­ated eco­nomic growth, ex­pected to come in at 7.4 per­cent this year and 7.2 per­cent in 2015, ac­cord­ing to the­World Bank’s most re­cent pro­jec­tions.

Th­ese growth rates are still con­sis­tent with the growth tar­get for the 12th FiveYear Plan (2011-15) pe­riod and would be the envy of any other coun­try. But for China, the cur­rent growth per­for­mance rep­re­sents a par­a­digm shift rel­a­tive to the high growth of the last 30 years which has helped China lift more than 500 mil­lion peo­ple out of poverty.

In an ef­fort to sus­tain growth in the short-term at cur­rent lev­els, the gov­ern­ment has taken ac­tions aimed at boost­ing de­mand and short-term growth in sec­tors such as real es­tate. The cen­tral bank, for ex­am­ple, re­cently low­ered in­ter­est rates on both de­posits and loans, the first rate cut since the sum­mer of 2012. The gov­ern­ment also cut mort­gage rates and re­laxed lend­ing stan­dards.

The key to Beijing’s con­tin­ued suc­cess, we be­lieve, will be the gov­ern­ment’s abil­ity to strike a bal­ance be­tween achiev­ing short-term tar­gets and pro­mot­ing longer-term, sus­tain­able growth.

In the short term, for ex­am­ple, the gov­ern­ment has the op­tion of fo­cus­ing on strength­en­ing mar­ket dis­ci­pline in the fi­nan­cial sec­tor. It could im­ple­ment poli­cies to fa­cil­i­tate the re­al­lo­ca­tion of re­sources from less pro­duc­tive sec­tors, in­clud­ing State-owned en­ter­prises, to those with high growth po­ten­tial. This would mean that China can delever­age while main­tain­ing growth by us­ing credit bet­ter. For ex­am­ple, the gov­ern­ment could grad­u­ally re­move im­plicit State guar­an­tees and let mar­ket forces de­cide whether com­pa­nies suc­ceed or not. Do­ing so could gen­er­ate ef­fi­ciency gains for the econ­omy.

In the medium term, China’s pri­mary chal­lenge is car­ry­ing out re­forms that will trans­form the econ­omy into a more ef­fi­cient one. That de­pends on the suc­cess of struc­tural re­forms in land, la­bor and cap­i­tal mar­kets. Good progress is al­ready be­ing made but more needs to be done.

For ex­am­ple, to in­te­grate mi­grant work­ers more fully into ur­ban life, the gov­ern­ment has an­nounced plans of grad­ual ad­just­ments in the hukou (house­hold reg­is­tra­tion) sys­tem, which would lead to more ef­fi­cient use of la­bor. It has also in­tro­duced a com­pre­hen­sive re­form plan to im­prove China’s pub­lic fi­nances, which would re­move the in­cen­tives for waste­ful real es­tate de­vel­op­ment and in­ef­fi­cient ur­ban sprawl.

Th­ese trans­for­ma­tional re­forms, which call for a care­fully co­or­di­nated ap­proach, will move China in the right di­rec­tion and lay the foun­da­tion for higher eco­nomic growth in the long run. But they will not re­verse a trend of mod­er­at­ing growth over the next decade. The ex­tent of mod­er­at­ing growth will there­fore in large part be de­ter­mined by the gov­ern­ment’s abil­ity to im­ple­ment the nec­es­sary pol­icy ac­tions.

As the global econ­omy con­tin­ues to strug­gle, es­pe­cially the economies of Ja­pan and Euro­pean Union, the world re­lies on China’s growth en­gine more than ever— in 2013 it ac­counted for 30 per­cent of global growth (37 per­cent at pur­chas­ing power par­ity) com­pared with 22 per­cent of the United States (10 per­cent at PPP) and less than 1 per­cent for the EU (PPP). While the mod­er­a­tion of growth in China may some­what soften global de­mand, it will en­hance prospects of the world’s sec­ond-largest econ­omy tran­si­tion­ing to a more sus­tain­able and ef­fi­cient growth path. The au­thor isWorld Bank vice -pres­i­dent for East Asia and Pa­cific.

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