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