China remains the darling of top economists

CHINA’S reform drive is winning plaudits from economists who are increasingly confident that excesses in the world’s second-largest economy can be tackled without derailing growth.

Faced with a debt pile rising toward three times annual output, a property market showing signs of turning, and entrenched interests slowing long-needed reform of state enterprises, China’s top officials are signalling that the tough jobs can’t be put off much longer.

People’s Bank of China research director Xu Zhong said at a conference in Beijing yesterday that after four decades of reform and development, most low-hanging fruit has been picked. What remains involves the hard stuff, like meaningful governance changes to state-owned companies and overhauling how local government is funded.

China must “bite the hard bones,” Xu said at the Caixin Summit. Reforms in the new era must break through the “psychological comfort zone,” he added, referencing President Xi Jinping’s heralding last month of a fresh period in the country’s development history. As that sentiment becomes increasingly widespread, economists at Goldman Sachs Group and Morgan Stanley are more upbeat that the economy can address its reform challenges without undermining the expansion.

Global investors have been buoyed by the solid year that China’s economy has put in, setting it up for potentially the first full-year acceleration since 2010. However, even optimists see a slowdown next year amid efforts to rein in excess borrowing and tame the property sector.

Economists estimate real gross domestic product growth of 6.4 percent next year, down from a projected 6.8 percent this year. Just how much debt-slashing goes on next year matters far beyond China, according to Goldman Sachs analysts led by chief Asia economist Andrew Tilton.

“The policy challenge for 2018 will be to move ahead on risk reduction and key reforms without too much of a slowdown,” Tilton wrote in a note yesterday. “Given that roughly half the world’s investment spending and more than a quarter of global growth occur in China, how its policy makers manage this balancing act remains central to the health of the world economy.” Goldman Sachs forecasts a 6.5 percent gain in 2018, revised higher last month from a prior estimate of 6.3 percent.

In October, Xi conspicuously dropped a previous Communist Party pledge to double 2010 output, signalling a fresh focus on the quality of economic growth rather than the mere adherence to nominal targets.