GROWTH AND RE­FORM

This will be a cru­cial year as China ties to meet its tar­get of join­ing the high-in­come club of na­tions, say lead­ing econ­o­mists, An­drew Moody re­ports.

China Daily (Canada) - - ANALYSIS -

The Chi­nese gov­ern­ment is set to re­con­firm in its Five-Year Plan (2016-20) in March, and the aim of be­com­ing a “mod­er­ately well-off so­ci­ety” by 2020.

This will in­volve break­ing out of the so-called mid­dlein­come trap that has en­snared de­vel­op­ing coun­tries, par­tic­u­larly in Latin Amer­ica.

The gov­ern­ment has set it­self a tar­get of dou­bling its 2010 GDP and per capita in­come by 2020.

How the econ­omy per­forms over the next 12 months will partly de­ter­mine how this goal can be achieved.

Pres­i­dent Xi Jin­ping has al­ready made clear that growth has to be a min­i­mum of 6.5 per­cent in each of the five years from now for the tar­get to be met.

The gov­ern­ment will also de­cide in March whether to stick to its 2015 growth tar­get of “about 7 per­cent” for the year ahead or to lower it, as some ex­pect, to some­where near or at 6.5 per­cent.

How­ever, the am­bi­tious over­all plan tar­get, comes at a time when the Chi­nese econ­omy faces many chal­lenges as well as global eco­nomic un­cer­tainty.

At the Cen­tral Eco­nomic Work Con­fer­ence, a key eco­nomic meet­ing held in Beijing last month, the gov­ern­ment made clear its pri­or­i­ties for the year ahead.

It wants to em­bark on ma­jor sup­ply side re­forms, tackle in­dus­trial over­ca­pac­ity, par­tic­u­larly in the Sta­te­owned en­ter­prise sec­tor, and free up cap­i­tal and la­bor to be re­de­ployed to faster grow­ing ar­eas of the econ­omy.

It also wants to tackle the key is­sue of a mas­sive over­sup­ply of un­sold homes, which is hold­ing back the property sec­tor — a key driver of the over­all econ­omy, fu­el­ing de­mand for steel, con­crete and house­hold goods.

To do this, it is to press ahead with re­forms to the house­hold reg­is­tra­tion scheme, or hukou, so as to al­low peo­ple to move from ru­ral ar­eas to the cities to buy up ex­ist­ing hous­ing stock.

Tack­ling lo­cal gov­ern­ment debt, a crit­i­cal weak­ness of the econ­omy, and al­low­ing mu­nic­i­pal­i­ties to is­sue bonds and de­velop more sus­tain­able fund­ing mech­a­nisms will also be a cen­tral plank of pol­icy.

Oliver Bar­ron, head of the China of­fice of Lon­don­based in­vest­ment bank NSBO, be­lieves pol­i­cy­mak­ers will take the nec­es­sary steps to achieve at least 6.7 per­cent GDP growth in 2016.

He thinks that if the gov­ern­ment is too bold on SOE re­form, it could un­der­mine its over­all growth strat­egy.

“Ef­forts to tackle stub­born in­dus­trial over­ca­pac­ity and push for­ward SOE re­form are a dou­ble-edged sword. They are nec­es­sary to se­cure sus­tain­able growth in the long term but will be put more down­ward pres­sure on eco­nomic growth in the short term.

“If growth is car­ried out too rapidly, there is sig­nif­i­cant down­side risk that it would fall be­low the ex­pected plan tar­get.”

Ge­orge Magnus, as­so­ciate at the Ox­ford Univer­sity China Cen­tre and an ex­pert on the Chi­nese econ­omy, said the con­fer­ence in Beijing last month un­veiled a new di­rec­tion in gov­ern­ment pol­icy.

Mea­sures to tackle SOE in­ef­fi­ciency, par­tic­u­larly the so-called zom­bie com­pa­nies, as well as re­duc­ing cor­po­ra­tion tax and ini­tia­tives to sup­port cer­tain in­dus­try sec­tors ap­peared to be a se­ri­ous at­tempt to set a new course, he said.

“They span se­ri­ous mea­sures to pro­mote ef­fi­ciency and boost to­tal fac­tor pro­duc­tiv­ity.”

He expects the gov­ern­ment to set a tar­get of 6.5 per­cent for GDP growth in March, be­low that of 2015.

“We are look­ing at a sit­u­a­tion where the growth tar­get re­mains the top pri­or­ity for pol­i­cy­mak­ers. We shouldn’t ig­nore the tra­di­tional tools of pol­icy that will be de­ployed to try to sup­port this.”

One of the main en­gines for growth next year is likely to be a more ex­pan­sion­ary fis­cal pol­icy.

Of­fi­cial state­ments from the Cen­tral Eco­nomic Work Con­fer­ence spoke of a more “proac­tive” as well as a “flex­i­ble” fis­cal pol­icy.

This would rep­re­sent a shift in di­rec­tion since there has been re­cent em­pha­sis on mon­e­tary pol­icy as the main eco­nomic tool.

In Oc­to­ber, the Peo­ple’s Bank of China cut the oneyear bench­mark in­ter­est rate by 0.25 per­cent to 4.35 per­cent, its sixth such move in 12 months.

There have been expectations in the mar­ket that China is now pre­pared to breach its tra­di­tional tar­get of not let­ting the cen­tral gov­ern­ment deficit ex­ceed 3 per­cent.

Ju­lian Evans- Pritchard, the Sin­ga­pore-based China econ­o­mist for Cap­i­tal Eco­nomics, a con­sul­tancy, also expects a more ex­pan­sion­ary fis­cal stance, al­though he still be­lieves mon­e­tary pol­icy will be a sig­nif­i­cant pol­icy tool.

“We still ex­pect some mon­e­tary eas­ing next year, al­though mostly at the be­gin­ning. Mon­e­tary pol­icy has al­ready eased quite a lot, and I don’t think we have seen the full im­pact of this yet.

“I think we are go­ing to see growth look­ing bet­ter and im­prov­ing as a re­sult of the mea­sures al­ready taken.”

Evans-Pritchard be­lieves the gov­ern­ment will prob­a­bly set a 7 per­cent growth tar­get for 2016 again but be­lieves that 6.5 per­cent would be a more pos­i­tive sign.

“I think that would be a clear sign that the peo­ple in the Party who are push­ing for less em­pha­sis on growth would have won a con­ces­sion.

“We are get­ting to a po­si­tion where it is not easy to con­trol growth. It has been slow­ing be­cause in­vest­ment has been slow­ing and this is be­cause the rate of re­turn on in­vest­ment has been fall­ing be­cause the cap­i­tal stock is al­ready quite large. There is not really much the gov­ern­ment can do about that.”

The new year be­gins against the back­drop of the United States Fed­eral Re­serve Bank’s move on Dec 16 to in­crease its bench­mark rate by 0.25 per­cent­age point.

It was the first tight­en­ing of mon­e­tary pol­icy in the West for seven years and could be one of a num­ber of such rises in 2016.

Paul Ma­son, au­thor of Post­cap­i­tal­ism: A Guide to Our Fu­ture, and also eco­nomics ed­i­tor of Chan­nel 4 News in Bri­tain, said this could be a test to the global econ­omy.

“We are not yet at the peak of the re­cov­ery cy­cle and we will find out whether the global econ­omy can sur­vive with­out stim­u­lus be­cause the Amer­i­cans have fi­nally with­drawn it.”

Re­gard­less of any rate rises, it is clear that the US econ­omy, which re­ported 2 per­cent third quar­ter growth on Dec 22, can­not build up any real mo­men­tum while there are head­winds else­where.

Higher US in­ter­est rates could lead to fur­ther cap­i­tal flight from China and other emerg­ing mar­kets and also have a desta­bi­liz­ing ef­fect on the Chi­nese yuan.

There was mar­ket tur­moil af­ter the Peo­ple’s Bank of China moved to a more mar­ke­to­ri­ented ex­change rate mech­a­nism on Aug 11 but de­spite this, the value of the yuan fell by only 3 per­cent in 2015.

How­ever, Bank of Amer­ica Mer­rill Lynch is fore­cast­ing an over­all 10 per­cent de­cline in the yuan-dol­lar ex­change rate.

Zhu Ning, deputy dean of the Shang­hai Ad­vanced In­sti­tute of Fi­nance and au­thor of the forth­com­ing book China’s Guar­an­teed Bub­ble, be­lieves the au­thor­i­ties will in­ter­vene to pre­vent this.

“There are cer­tainly such expectations out there in the mar­ket but I think the Peo­ple’s Bank of China will be really re­luc­tant to let the mar­ket get what it hopes for,” he said.

“Even though ev­ery­one knows it has to go down a cer­tain amount, the bank still has a large amount of re­serves on hand to achieve a se­ries of tech­ni­cal de­pre­ci­a­tions rather than a large one off devaluation.”

The risks in the global land­scape are dif­fer­ent from what they were 12 months ago.

Then the big­gest fo­cus was on Europe and whether Greece would blow the euro apart, whereas this year the big­gest con­cern is likely to be the emerg­ing economies.

Coun­tries such as Brazil, Rus­sia, Saudi Ara­bia, South Africa and Nige­ria have all been hit hard by fall­ing com­mod­ity prices and could prove a drag on global growth.

Evans-Pritchard of Cap­i­tal Eco­nomics agrees emerg­ing mar­kets are now the ma­jor con­cern.

“Economies like Brazil and Saudi Ara­bia have really strug­gled over the last year be­cause of lower oil prices. De­spite all the at­ten­tion on China and its slow­ing growth, it ben­e­fits from lower com­mod­ity prices and is in a good po­si­tion to weather the storm this year.”

How­ever, Zhu at the Shang­hai Ad­vanced In­sti­tute of Fi­nance, be­lieves the im­pact of fall­ing com­mod­ity prices is more nu­anced for China.

“China does get some pos­i­tive feed­back ef­fects from com­mod­ity prices fall­ing, but some of th­ese emerg­ing economies have be­come im­por­tant mar­kets for China, and this could be bad news for the coun­try’s ex­ports,” he said.

Eco­nomics com­men­ta­tor Ma­son expects growth in China to fall in 2016 but does not ex­pect any hard land­ing.

“For me, the out­look for China is long-term pos­i­tive. I do not see any doom-laden sce­nario.”

He be­lieves even if China does ex­pe­ri­ence in­vest­ment bub­bles such as with the stock mar­ket crash in 2015, it is still left with tan­gi­ble as­sets that will con­tinue to drive growth.

“Un­der­ly­ing ev­ery­thing you have real things. There are real high-speed trains, there are new bridges, there is new hous­ing on a vast scale. What­ever hap­pens this phys­i­cal stock of in­fra­struc­ture will re­main.”

Ef­forts to tackle stub­born in­dus­trial over­ca­pac­ity and push for­ward SOE re­form are a dou­ble-edged sword.”

head of the China of­fice of Lon­don-based in­vest­ment bank NSBO

Con­tact the writer at an­drew­moody@chi­nadaily.com.cn

LIU DE­BIN / FOR CHINA DAILY

A worker weights a group of pre­ci­sion al­loy in a State-owned en­ter­prise in Dalian, Liaon­ing prov­ince.

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