China has ca­pac­ity to deal with ma­jor chal­lenges: Euro­pean ex­perts

The Pak Banker - - 6BUSINESS -

Euro­pean ex­perts said China's lower growth tar­get is a good sign as it re­flects re­al­ity and that al­though China faces a num­ber of ur­gent eco­nomic prob­lems, it has shown the ca­pac­ity to deal with ma­jor pol­icy chal­lenges.

China's eco­nomic growth tar­get has been set at 6.5 per­cent to 7 per­cent in 2016, with an av­er­age an­nual growth rate of at least 6.5 per­cent through 2020, Premier Li Ke­qiang said re­cently when pre­sent­ing the govern­ment's work re­port to an an­nual par­lia­men­tary ses­sion.

"The lower growth tar­get is a good sign as it re­flects re­al­ity. More­over, given that it ap­plies to a longer pe­riod it means that growth could gen­tly de­cel­er­ate un­til 2020," Daniel Gros, di­rec­tor of the Cen­ter for Euro­pean Pol­icy Stud­ies (CEPS), said in an in­ter­view with Xin­hua. "Whether the tar­get of 6.5 per­cent to 7 per­cent can be reached will de­pend largely on do­mes­tic de­vel­op­ments in China, be­cause the cur­rent ex­ter­nal en­vi­ron­ment in de­vel­oped economies like the United States, the EU and Ja­pan is not good," said Dun­can Free­man, se­nior re­search fel­low at the Brus­sels Academy for China and Euro­pean Stud­ies. Free­man said the tra­di­tional driv­ers of the econ­omy are no longer play­ing the same role as they did in the past, so suc­cess in main­tain­ing growth in China will de­pend on whether new driv­ers of growth can be found.

The Chi­nese econ­omy has stepped into a tran­si­tion pe­riod. As part of its eco­nomic re­struc­tur­ing, China an­nounced to ini­tially cut some 1.8 mil­lion jobs in the steel and car­bon sec­tors in mainly state-owned com­pa­nies.

Free­man said the re­duc­tion of jobs in the steel and coal sec­tors re­flected what was al­ready hap­pen­ing as de­mand falls and over­ca­pac­ity in­creases in th­ese and other heavy in­dus­trial sec­tors.

Some of the lost growth and jobs can be re­placed in new sec­tors like re­new­able en­ergy which are grow­ing very rapidly but a key chal­lenge in the trans­fer of work­ers from the old to new sec­tors will be whether they can gain new skills through in­vest­ment in re­train­ing, Free­man added.

Free­man's view was echoed by Gros. "Get­ting rid of over-ca­pac­ity is al­ways dif­fi­cult. It is good that the prob­lem has been rec­og­nized, but it will not be eas­ily solved," Gros said.

It took Europe 20 years to deal with its own over­ca­pac­ity prob­lem in the same sec­tors dur­ing the 1970s and 80s.

China faces sig­nif­i­cant ex­ter­nal risks as the United States, EU and Ja­pan will have dif­fi­culty in sus­tain­ing growth.

"But there is lit­tle that China can do by it­self to di­min­ish the risk of pol­icy fail­ure in other ma­jor economies, al­though greater pol­icy co­or­di­na­tion on a global level will help deal with the prob­lems of sus­tain­ing growth," Free­man said. China also must deal with do­mes­tic risks, and the fi­nan­cial sys­tem re­mains one of the ma­jor chal­lenges. How­ever, Free­man be­lieves China has greater pol­icy scope to take ac­tion in the do­mes­tic arena, and should con­tinue push­ing for­ward with re­form in the fi­nan­cial sec­tor to en­sure that prob­lems are dealt with.

"Though China faces a num­ber of ur­gent eco­nomic prob­lems, in the past it has shown the ca­pac­ity to deal with ma­jor pol­icy chal­lenges," Free­man added. Free­man said this would de­pend on China's con­tin­u­ing com­mit­ment to re­form to push through the nec­es­sary changes to sus­tain the on­go­ing eco­nomic tran­si­tion.

"Al­though th­ese chal­lenges are huge, China still has pol­icy space to con­tinue the path of re­form, and there are sig­nif­i­cant po­ten­tial gains if re­form is sus­tained," he said.

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