A win­dow on China’s ‘new nor­mal’

Financial Mirror (Cyprus) - - FRONT PAGE -

Ev­ery year at this time, China’s gov­ern­ment or­gan­ises a ma­jor con­fer­ence – spon­sored by the Devel­op­ment Re­search Cen­ter, the of­fi­cial think tank of the State Coun­cil – that brings to­gether se­nior Chi­nese of­fi­cials, CEOs from ma­jor Chi­nese and West­ern firms, and a small group of in­ter­na­tional of­fi­cials and aca­demics. The China Devel­op­ment Fo­rum (CDF) oc­curs just af­ter the an­nual Na­tional Peo­ple’s Congress.

At the fo­rum, speak­ers, in­clud­ing the fi­nance min­is­ter and the head of the cen­tral bank, sum­marise the Chi­nese lead­er­ship’s cur­rent think­ing. Of­fi­cials then lis­ten to com­ments and sug­ges­tions from West­ern busi­ness and aca­demic par­tic­i­pants, in­clud­ing a ques­tion and an­swer ses­sion with Pre­mier Li Ke­qiang.

Although I have been at­tend­ing the CDF’s meet­ings for more than a decade, I found this year’s con­fer­ence sub­stan­tially dif­fer­ent from any in the past. The key dif­fer­ence was the of­fi­cial Chi­nese recog­ni­tion that an­nual real GDP growth has de­clined per­ma­nently from the past three decades’ av­er­age rate of nearly 10%. The of­fi­cial es­ti­mate is that real GDP grew 7.4% in 2014, and that the rate will prob­a­bly slow fur­ther, to 7%, this year. The Devel­op­ment Re­search Cen­ter pre­sented de­tailed es­ti­mates show­ing that the growth rate will con­tinue to decline, reach­ing about 6% by the end of the decade.

Vir­tu­ally ev­ery Chi­nese of­fi­cial re­ferred to this slow­down as their coun­try’s “new nor­mal.” They all seemed rec­on­ciled to slower growth, which was ini­tially sur­pris­ing, be­cause of­fi­cials pre­vi­ously ar­gued that China needed rapid growth to main­tain em­ploy­ment and avoid po­lit­i­cal un­rest. They now ap­pear to un­der­stand that the de­clin­ing growth rate will not lead to un­em­ploy­ment, be­cause the slow­down re­flects China’s struc­tural shift from ex­port-ori­ented heavy industrial pro­duc­tion to in­creased pro­duc­tion of con­sumer ser­vices, which re­quire more em­ploy­ment to cre­ate the same amount of value.

Stronger growth nev­er­the­less re­mains nec­es­sary, be­cause China is still a rel­a­tively low-in­come coun­try with sub­stan­tial poverty. Although China’s to­tal real GDP is sec­ond only to that of the United States (and might be larger when mea­sured in terms of pur­chas­ing power), its per capita in­come is only about $7,000, or roughly 15% of the US level. And con­sump­tion re­mains low – only about 50% of GDP when gov­ern­ment spend­ing is in­cluded, and just 35% when limited to house­hold con­sumer spend­ing. So, China has a long way to go to reach its lead­ers’ goal of achiev­ing a “mod­ern pros­per­ous so­ci­ety.”

The Chi­nese see that the “new nor­mal” re­quires a shift in their growth strat­egy from fac­tor-driven growth to in­no­va­tion-driven growth. But it is not clear how that in­crease in in­no­va­tion will be achieved. While of­fi­cials stress re­liance on the mar­ket, China does not have the ven­ture cap­i­tal and “an­gel fi­nanc­ing” that fa­cil­i­tates in­no­va­tion in the US.

The au­thor­i­ties may hope that their plan to in­sure bank de­posits will shift de­posits from the three largest banks to many smaller banks around the coun­try, fa­cil­i­tat­ing lo­cal star­tups’ ac­cess to fi­nanc­ing.

Many other eco­nomic prob­lems loom. Of­fi­cials ac­knowl­edged at the CDF that the big­gest risks lie in the fi­nan­cial sec­tor, par­tic­u­larly ow­ing to lo­cal gov­ern­ments’ very large li­a­bil­i­ties. In the past, the gov­ern­ment dealt with the prob­lems that th­ese li­a­bil­i­ties caused for the bank­ing sys­tem by in­ject­ing funds into the banks.

En­vi­ron­men­tal prob­lems are an­other pow­er­ful drag on China’s cur­rent stan­dard of living. But they also rep­re­sent a po­ten­tial way to in­crease GDP should over­all de­mand decline sig­nif­i­cantly.

China ac­knowl­edges that high lev­els of air and wa­ter pol­lu­tion cre­ate dis­com­fort and harm the public’s health. Gov­ern­ment spend­ing on rem­e­dy­ing en­vi­ron­men­tal dam­age could ab­sorb sub­stan­tial funds if de­mand-side weak­ness ex­ac­er­bates the ex­pected sup­ply-side slow­down.

More­over, the very weak per­for­mance of

state-owned en­ter­prises, which con­tinue to play a large role in heavy in­dus­try and in some ser­vice sec­tors, rep­re­sents a pow­er­ful brake on growth. Although of­fi­cial pol­icy aims to re­duce th­ese firms’ role so that “the mar­ket can play the de­ci­sive role in re­source al­lo­ca­tion,” shrink­ing th­ese firms has proved to be dif­fi­cult, ow­ing to their strong po­lit­i­cal back­ing within the Chi­nese Com­mu­nist Party.

At the same time, China main­tains re­stric­tions on di­rect in­vest­ment by for­eign­ers, lim­it­ing both the kinds of firms and the share of joint ven­tures that they can own. The of­fi­cial pol­icy is to re­duce the bar­ri­ers to for­eign cor­po­rate in­vest­ment, es­pe­cially in high tech and the ser­vice sec­tor.

There were, of course, a num­ber of sub­jects that re­mained just be­low the sur­face and were not dis­cussed at this year’s CDF. There was no in­di­ca­tion of a slow­down in Pres­i­dent Xi Jin­ping’s anti-cor­rup­tion cam­paign, though some pri­vate con­ver­sa­tions sug­gested that the cam­paign has re­sulted in de­ci­sion-mak­ing de­lays that are hurt­ing pro­duc­tiv­ity and growth.

There was also no dis­cus­sion of Chi­nese cy­ber theft of West­ern tech­nol­ogy. When that sub­ject was raised in 2014, Li de­nied that the Chi­nese do such a thing, but noted that Chi­nese firms are hacked by do­mes­tic sources. And, with the CDF’s em­pha­sis on co­op­er­a­tion, there was no dis­cus­sion of pos­si­ble mil­i­tary ac­tion by the Chi­nese to stake their dis­puted ter­ri­to­rial claims in the East and South China Seas.

Meet­ings like the CDF pro­vide a use­ful win­dow into a coun­try whose im­por­tance for the global econ­omy will con­tinue to grow. The cur­rent slow­down to a new nor­mal makes such win­dows even more im­por­tant.

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