ON COURSE

As a re­form con­tin­ues, China is well on its way to tar­gets for 2020 on GDP, per capita in­come and eras­ing poverty

China Daily European Weekly - - Front Page - By AN­DREW MOODY an­drew­[email protected]­nadaily.com.en

“Re­form and open­ing-up has been the only path to the devel­op­ment and progress of con­tem­po­rary China, and the only path to the re­al­iza­tion of the Chi­nese dream.” XI JIN­PING Pres­i­dent

China is set to con­tinue its strong growth this year and is on course to be­come a “mod­er­ately well-off so­ci­ety” by 2020, ac­cord­ing to ex­perts.

The econ­omy is ex­pected to grow by 6.4 per­cent over the year, ac­cord­ing to a World Bank fore­cast on Dec 19.

The Chi­nese gov­ern­ment’s tar­get last year of around 6.5 per­cent, “or higher, if pos­si­ble”, al­ready looks set to be com­fort­ably achieved, with 6.8 per­cent recorded in the third quar­ter af­ter two suc­ces­sive quar­ters of 6.9 per­cent. The full-year data will be avail­able later this month.

The global econ­omy is also set to de­liver one of its best per­for­mances since the im­me­di­ate af­ter­math of the global fi­nan­cial cri­sis, with the IMF fore­cast­ing GDP growth of 3.7 per­cent for the year ahead.

There also ap­pears to be a less un­cer­tain out­look com­pared with the be­gin-

“With the lead­er­ship we have now, there would be no re­turn to the tra­di­tional levers such as in­fra­struc­ture in­vest­ment to drive the econ­omy should growth fall be­low ex­pec­ta­tions.” DONNA KWOK, se­nior China econ­o­mist at in­vest­ment bank UBS in Hong Kong

ning of last year, when con­cerns arose about then newly elected US Pres­i­dent Don­ald Trump fol­low­ing a pro­tec­tion­ist agenda and there were wor­ries about a far-right break­through in the French pres­i­den­tial elec­tion as well as the reper­cus­sions of Brexit.

The main worry this year will be how the global econ­omy will re­act to a tight­en­ing of mone­tary pol­icy in the United States, with the Fed­eral Re­serve ex­pected to raise in­ter­est rates three or even four times dur­ing the year.

For China, hit­ting the 2020 tar­get of dou­bling 2010 GDP and per capita in­come is an im­por­tant one, since it will come in time for the 100th an­niver­sary of the found­ing of the Com­mu­nist Party of China in 2021.

It also would mean that the world’s sec­ond-largest econ­omy had es­caped the so-called mid­dle-in­come trap that has be­fallen many de­vel­op­ing coun­tries, and had be­come a high-in­come coun­try.

This will be the first year when eco­nomic pol­icy will be in­formed by Xi Jin­ping Thought on So­cial­ism with Chi­nese Char­ac­ter­is­tics for a New Era. This places em­pha­sis on the Party’s lead­er­ship in eco­nomic man­age- ment as well as the mar­ket’s role in re­source dis­tri­bu­tion and eco­nomic devel­op­ment that ben­e­fits the pop­u­la­tion as a whole, in ad­di­tion to sup­ply-side struc­tural re­form.

The pol­icy goals were set out at the Cen­tral Eco­nomic Work Con­fer­ence held in De­cem­ber in Bei­jing.

In his New Year ad­dress, Pres­i­dent Xi reaf­firmed his solemn com­mit­ment to lift all of the coun­try’s ru­ral im­pov­er­ished peo­ple out of poverty un­der cur­rent stan­dards by 2020.

“This will be the first time in thou­sands of years of Chi­nese his­tory that ex­treme poverty has been elim­i­nated,” Xi said.

China will also take the op­por­tu­nity on the this year’s 40th an­niver­sary of re­form and open­ing-up to carry them through to the end, Xi said, pledg­ing ef­forts to “sur­mount all ob­sta­cles to carry the re­form fur­ther to its ul­ti­mate tri­umph”.

“Re­form and open­ing-up has been the only path to the devel­op­ment and progress of con­tem­po­rary China, and the only path to the re­al­iza­tion of the Chi­nese dream,” he said.

The gov­ern­ment is look­ing to achieve higher-qual­ity and more sus­tain­able growth as well as greater equal­ity in terms of shar­ing eco­nomic ben­e­fits, and to man­age fi­nan­cial risk both by rein­ing in debt and pre- vent­ing as­set bub­bles, par­tic­u­larly in the prop­erty sec­tor.

Louis Kuijs, Hong Kong-based head of Asia for Ox­ford Eco­nomics, ex­pects the growth tar­get to be set at around 6.5 per­cent in March, but he be­lieves there would be ben­e­fits to set­ting it lower.

“If the tar­get for growth were 6.3, or even 6.2 per­cent, it would take off some of the pres­sure, which in my view would be good.”

He be­lieves that pol­icy this year will be in­formed by Xi’s re­port to the 19th CPC Na­tional Congress in Oc­to­ber and the new era Xi has es­poused.

“We are en­ter­ing a new era and peo­ple’s ex­pec­ta­tions are ris­ing, so there will be a fo­cus on do­ing bet­ter in pro­vid­ing good ed­u­ca­tion and bet­ter health­care. For the econ­omy to af­ford such fis­cal out­lay, there will also have to be an em­pha­sis on in­no­va­tion, such as the Made in China 2025 strat­egy and the up­grad­ing of the econ­omy,” he says.

“In terms of growth, qual­ity is now go­ing to be more im­por­tant than the quan­tity of the past, and also a recog­ni­tion that the eco­nomic ben­e­fits need to be more equally spread across so­ci­ety.”

Stephen Roach, se­nior fel­low at the Jack­son In­sti­tute for Global Af­fairs at Yale Uni­ver­sity, ex­pects the Chi­nese gov­ern­ment to set a tar­get of be­tween 6 and 6.5 per­cent and be on course for its cen­tral aim of dou­bling 2010 GDP per capita by 2020.

How­ever, he be­lieves the main chal­lenge re­mains the re­form of State-owned en­ter­prises.

“It is the one area of re­form in China that I am most con­cerned with. I don’t be­lieve the mixed own­er­ship ap­proach (China is pi­lot­ing pri­vate­sec­tor in­vest­ment in some SOEs) is

the right so­lu­tion. This is about fi­nan­cial en­gi­neer­ing when the real prob­lem is es­sen­tially op­er­a­tional ef­fi­ciency.”

For Roach, the au­thor of Un­bal­anced: The Code­pen­dency of Amer­ica

and China, the main global risk this year is the US econ­omy, with the po­ten­tial of eq­uity mar­kets re­spond­ing badly to the ex­pected in­ter­est rate in­creases by the Fed­eral Re­serve.

“The end of easy money could lead to an over­re­ac­tion in the eq­uity mar­kets, es­pe­cially in the US, where price-earn­ings ra­tios are higher than at any point other than 1929 (be­fore the Wall Street Crash) or 2000 (at the height of the dot.com bub­ble),” he says.

“This cor­rec­tion could be 10 to 15 per­cent, but it could be of cri­sis pro­por­tions if there were any shocks such as the risk of a mil­i­tary con­fronta­tion in North Korea or some kind of US-China trade war.”

Donna Kwok, se­nior China econ­o­mist at in­vest­ment bank UBS in Hong Kong, be­lieves the tar­get for growth will be set at around 6.5 per­cent.

“They have set them­selves an ex­plicit tar­get of at least 6.3 per­cent for the next three years (to achieve the

over­all 2020 tar­get) and I ex­pect them to con­tinue with this range. It serves a pur­pose in that it an­chors ex­pec­ta­tions both within China and out­side.”

She says mone­tary con­di­tions within China are cur­rently quite “tight”. The Peo­ple’s Bank of China raised its cen­tral rate by 5 ba­sis points in De­cem­ber within hours of the Fed rais­ing its rate by a quar­ter of a per­cent­age point.

“If we are go­ing to see any new di­rec­tion of pol­icy this year, it will come in the sec­ond quar­ter, and you might find macro pol­icy a lit­tle less hawk­ish than it is now,” she says.

“The gov­ern­ment has been push­ing through re­forms mainly to con­tain fi­nan­cial risk and it has been able to do so with growth also do­ing OK.

“It may take off some of that in­ten­sity dur­ing the year. I think with the lead­er­ship we have now, there would be no re­turn to the tra­di­tional levers such as in­fra­struc­ture in­vest­ment to drive the econ­omy should growth fall be­low ex­pec­ta­tions.”

Zhu Ning, Ocean­wide pro­fes­sor of fi­nance at Ts­inghua Uni­ver­sity and au­thor of China’s Guar­an­teed Bub­ble, be­lieves stronger-than-ex­pected growth last year was sup­ported by the boom in the hous­ing mar­ket in 2016, which saw prices soar in Shang­hai, Bei­jing and other ma­jor ci­ties by more than 20 per­cent.

“There was a wealth ef­fect from this, and that is why I ex­pect growth to grad­u­ally come down the stairs in 2018.”

He ex­pects the gov­ern­ment to set a tar­get of around 6.5 per­cent, but he be­lieves there are still fi­nan­cial risks in the econ­omy and the risk that as­set bub­bles may burst, par­tic­u­larly in the hous­ing sec­tor.

“The real risk is in the third- and fourth-tier ci­ties rather than in the ma­jor ones. I would not be sur­prised if there is a 20 to 30 per­cent cor­rec­tion there. It is fair to say there is no real de­mand in many of these ci­ties.”

George Mag­nus, re­search as­so­ciate at the Uni­ver­sity of Ox­ford China Cen­tre, says 2017 was an un­usual year when the global econ­omy was “fir­ing on all cylin­ders”, with most re­gions do­ing well — and he ex­pects some of that mo­men­tum to be car­ried for­ward into this year. He also ex­pects China to tar­get 6 to 6.5 per­cent growth.

“The up­side sur­prise of last year was how di­ver­si­fied global growth was. The US seemed in par­tic­u­larly good shape, Ja­pan was chug­ging away, Europe — apart from per­haps the UK — was hav­ing a pur­ple patch, and China was a lot more sta­ble than many thought would be the case only 18 months ago.”

He is con­cerned, how­ever, that the US in par­tic­u­lar is now in its third­longest ex­pan­sion­ary phase since the end of World War II, ex­tend­ing to 102 months since June 2009, ac­cord­ing to the Cam­bridge, Mas­sachusetts­based Na­tional Bureau of Eco­nomic Re­search.

If this con­tin­ues un­til June this year, it will sur­pass the ex­pan­sion be­tween Fe­bru­ary 1961 and Novem­ber 1970. The long­est ex­pan­sion since 1945 was be­tween March 1991 and Novem­ber 2001.

“The con­cern has to be that this ex­pan­sion is be­com­ing very long in the tooth, and although you can­not see any overt cat­a­lyst for a busi­ness slow­down, we are surely due for one to hap­pen.”

Michael Power, strate­gist for In­vestec As­set Man­age­ment based in Cape Town, South Africa, ex­pects China to be able to achieve an av­er­age of 6 per­cent growth up to 2030, putting it on course to be the world’s largest econ­omy.

“This is a dis­tinct pos­si­bil­ity. I ex­pect it to be higher in the shorter term and lower in the longer term,” he says.

He be­lieves the strength of China’s econ­omy re­mains im­por­tant for com­modi­ties on which many African economies still de­pend, and he ex­pects them to con­tinue their re­cov­ery in 2018.

“Pro­vid­ing there is no ex­plicit neg­a­tive fi­nan­cial event in 2018, most com­mod­ity prices will con­tinue to edge up, but some will prob­a­bly do bet­ter than oth­ers. Those met­als as­so­ci­ated with the re­new­able rev­o­lu­tion such as lithium, cobalt, nickel and alu­minum will con­tinue their sec­u­lar bull run un­til the sup­ply side can catch up with their bur­geon­ing de­mand. This will ben­e­fit Zam­bia and the Demo­cratic Repub­lic of Congo with their sig­nif­i­cant cop­per and cobalt pro­duc­tion.”

Power says that as China en­ters a new era, it is seen as a devel­op­ment role model by a num­ber of African coun­tries.

“East­ern Africa and, in par­tic­u­lar, Ethiopia, is fol­low­ing China’s ex­am­ple of man­u­fac­ture-for-ex­port to a far greater de­gree than the rest of the African con­ti­nent. It helps that east­ern Africa is Africa’s best-po­si­tioned ge­o­graphic re­gion, look­ing across the In­dian Ocean at a fast-grow­ing Asia,” he says.

“Much of the rest of Africa has not moved be­yond the model of com­mod­ity, ser­vices and con­sump­tion­led growth.”

Dou­glas McWil­liams, deputy chair­man of the Cen­tre for Eco­nomics and Busi­ness Re­search in Lon­don, be­lieves China grew faster in 2017 than the of­fi­cial fig­ures sug­gest. He be­lieves GDP has risen by around 10 per­cent and that the tar­get may be around 7 per­cent for 2018.

“The rate of growth of im­ports has been 20 per­cent, and if you halve that, you nor­mally get the GDP growth rate. I be­lieve the of­fi­cial statis­tics are al­ways ac­cu­rate over the longer term, but there is a ten­dency to un­der­re­port in the good years, of which 2017 was one.”

In his eco­nomic re­search con­sul­tancy’s World Eco­nomic League Ta­ble pub­lished on Dec 26, China is pre­dicted to over­take the United States as the world’s largest econ­omy by 2030. It also points to In­dia over­tak­ing the UK and France to be­come the world’s fourth-largest econ­omy in 2018.

“Look­ing for­ward, In­dia could be on course to be­com­ing the world’s largest econ­omy to­ward the end of the cen­tury be­cause of its grow­ing pop­u­la­tion, although it will re­main a long way be­hind in per capita in­come terms,” he says.

In the league ta­ble, African coun­tries also fea­ture promi­nently with Nige­ria, Africa’s big­gest econ­omy, ranked 31st in 2018 and South Africa 33rd. By 2032, Egypt is ex­pected to be Africa’s largest econ­omy, rank­ing 26th in the world.

“All the African coun­tries are climb­ing up the league ta­ble, although I am less op­ti­mistic about South Africa and Nige­ria be­cause of struc­tural weak­nesses,” McWil­liams says.

Debt risk in China is likely to re­main a sig­nif­i­cant is­sue this year. An In­ter­na­tional Mone­tary Fund re­port pub­lished in De­cem­ber, which praised Pres­i­dent Xi’s com­mit­ment to tack­ling the is­sue, pointed out that credit growth had out­paced GDP growth and was now 25 per­cent above its long-term trend.

It also high­lighted that cor­po­rate debt was now 165 per­cent of GDP and house­hold debt had grown markedly, largely as a re­sult of spec­u­la­tion in the hous­ing mar­ket.

Roach at Yale in­sists, how­ever, that this is un­likely to re­sult in a debt cri­sis.

“The gov­ern­ment can still han­dle this. China has an ex­tra­or­di­nary sav­ings rate. They have a very high level of for­eign ex­change re­serves and they are not ex­posed to in­ter­na­tional short-term hot money sup­port­ing the econ­omy, which was the prob­lem of the Asian fi­nan­cial cri­sis of the late 1990s. They have a cush­ion and time to ad­dress this.”

Kwok at UBS be­lieves the risk of a debt cri­sis re­ceded over the past year.

“I would say there is less con­cern than this time last year. Although it is still a se­ri­ous is­sue, there have been some struc­tural im­prove­ments in China’s over­all debt pic­ture. So although debt to GDP is set to con­tinue to rise over the next two to three years, it will be at a slower pace than be­fore.”

This year is im­por­tant for China in that it is the 40th an­niver­sary of the launch of re­form and open­ing-up by Deng Xiaop­ing in 1978.

China’s open­ing up to the out­side world is seen by those close to China as one of the mo­men­tous events in world his­tory, even­tu­ally de­liv­er­ing 700 mil­lion peo­ple out of poverty.

Mag­nus, who is set to pub­lish a new book Red Flags this year which will ar­gue that re­form and openingup was one of China’s great­est in­sti­tu­tional re­forms, says the ini­tia­tive can­not be un­der­es­ti­mated.

“With­out ques­tion, China’s rise over the past 40 years was down to re­form and open­ing-up. It is a pe­riod in which pro­duc­tiv­ity ex­ploded as a con­se­quence of the poli­cies that were fol­lowed. We haven’t re­ally seen any­thing like that,” he says.

“Peo­ple who know about China are acutely aware of this, but I am not sure whether this is so gen­er­ally un­der­stood in the West.”

Kuijs at Ox­ford Eco­nomics also be­lieves that re­form and open­ing-up was mo­men­tous, but says it is the plat­form on which it is now mov­ing on to a “new era” where the fo­cus will not just be on eco­nomic growth.

“It was clear from the Party Congress there is now go­ing to be much more fo­cus on tack­ling inequal­ity within so­ci­ety and deal­ing with en­vi­ron­men­tal is­sues,” he says.

“The lead­er­ship, how­ever, also want to build on the pre­vi­ous legacy by fur­ther open­ing up the econ­omy to the out­side world and open up mar­kets to for­eign com­pa­nies.”

Roach at Yale says he is more op­ti­mistic about the out­look for China fol­low­ing the CPC’s 19th Na­tional Congress, dur­ing which Xi laid out his goals for China up to the mid­dle of the cen­tury.

“I drew a lot of com­fort from Xi’s com­mit­ment to deal with the key eco­nomic is­sues fac­ing China. He has added an ide­o­log­i­cal di­men­sion to this, when what went be­fore was largely an­a­lyt­i­cal. His fo­cus on gov­er­nance and im­ple­men­ta­tion is ab­so­lutely vi­tal if the goals that have been set are to be met.”

XIN­HUA

Pres­i­dent Xi Jin­ping de­liv­ers his New Year ad­dress on Dec 31. It was aired on tele­vi­sion, ra­dio and the in­ter­net.

LI MIN / CHINA DAILY

PHO­TOS PRO­VIDED TO CHINA DAILY

Donna Kwok, se­nior China econ­o­mist at in­vest­ment bank UBS in Hong Kong, be­lieves the tar­get for growth will be set at around 6.5 per­cent.

Stephen Roach, se­nior fel­low at the Jack­son In­sti­tute for Global Af­fairs at Yale Uni­ver­sity

George Mag­nus, re­search as­so­ciate at the Uni­ver­sity of Ox­ford China Cen­tre

Louis Kuijs, Hong Kong-based head of Asia for Ox­ford Eco­nomics

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