Staying the course on structural reforms
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.