Premier Li Keqiang’s article “China will Stay the Course on Sustainable Growth” published on September 9 in The Financial Times expressed the Chinese government’s confidence in the country’s economic development, and also answered such widely concerned questions as “will there be a debt or financial crisis in China?” and “where is China’s reform headed?”
In the recent two years, negative comments about China’s economy have abounded. Some even predicted that China’s economy would collapse soon. Is that true? Let’s look at the macro-economic data. The growth of China’s GDP dropped 0.1 percentage point from the 7.6% in the second quarter of 2012 to the 7.5% in the second quarter of 2013. In the same period, the United States’ GDP growth fell from 2.8% to 1.4%. That indicates that China’s economy has not shown any sign of “precipitous slide”, let alone a collapse. Then why is there such an increase in pessimistic outlooks on China’s economy?
It is true that risks have begun to emerge as the tide of China’s economic growth has ebbed in the past two years. China’s economy has entered the stage of “sustaining the backlash” of early-stage policies, “gearing down” from the growth momentum and “going through the labor pain” of economic restructuring. Debt and financial risks have grown, as one would expect.
Currently, China’s debt amounts to 50% of GDP, lower than the alarming international level of 60%, and much lower than the world’s average of 80% and the 100% in the advanced economies. However, one still has reasons to worry, as most local government debts have entered the stage of debt service, and the opaqueness in the implicit government guarantee on debts has led to the emergence of spillover risks.
With regard to financial risks, the current local government loans from financing platforms plus the real estate loans account for almost 35% of the total. That has produced a considerable “crowding out effect” on real economy entities and pushed up the nonperforming loan ratio. It is thus evident that the distorted allocation of resources in terms of time, structure and orientation is the root cause of all the risks and structural imbalance in China.
In fact, the efficiency of capital use has been falling in China in recent years. In the past five years, China’s increased capital output rate – the ratio of increased investment to the growth of gross national product – has risen year by year. That means larger amounts of capital have to be injected constantly for the economy to keep growing.
Currently the central government is using the method of “micro stimulus” to “keep the growth steady and have the risks under control.” For instance the central bank has adopted a few policies to meet the market’s demand for liquidity; the government has taken measures to reduce burdens for small and medium-sized enterprises, sped up the rebuilding of shantytowns and the building of railway and infrastructure in central and western regions, and enlarged investment in public services. These measures have helped stop the real economy’s downturn. Statistics suggest that manufacturing industries, foreign trade, investment and stockpiles all have shown positive signs since July. The economic growth is very likely to accelerate in the second half of the year.
However, those short-term policy incentives were not the only source of confidence for Premier Li. His confidence was more derived from the Chinese government’s determination to further the reform drive. After all, what China is facing now is a structural risk rather than a risk for the entire economy. Therefore, the settlement of the problems depends on the restructuring of the economy. The Third Session of the 18th Central Committee of the Communist Party of China to be held in November will undoubtedly adopt new reform policies of long-term significance.
Reform should not be pushed only by demand. It should also keep up with innovative ideas. In the new round of reform, a whole package of reform measures will be put forward for realizing three goals, namely “easing government control, optimizing institutional supply and raising the efficiency of productive factors.” Beside fiscal, taxation, financing and administrative reforms, “financing and entity rebalance” is the key part of the new round of reform. By controlling money supply, the government will prevent China’s economy from becoming an excessive debt-ridden one. To address the problem of over capacity, the regular measures include opening new markets, enhancing domestic demands and cutting down on production capacity. In addition to these measures, raising the standards for environmental protection and technical specifications and changing the model of investment-driven growth will also help.
Besides, the government may give more attention to supply in the supply-demand relationship, although equal importance will be attached to the demand side. The new urbanization strategy, the optimizing of the supply of production factors such as human capital, financial and banking resources, technological innovation and property rights, and the initiation of a new round of reform triggered by the establishment of the Shanghai Free-Trade Area will help raise the efficiency of allocation of production factors. For its own reform, the government will “simplify administration and delegate power”. This is not only delegating powers to lower levels but it also means that the government should delegate power to the market. By doing so, the power monopoly will be broken so that China’s economy will return to the track of market economy.
More than 30 years have passed since China launched its reform and opening-up drive. Every decade has seen more growth. The first decade was marked by the dividend from production factors. In the second decade, the dividend was generated by the system reform. The third decade was a period of harvesting dividend from globalization. Now, the new round of reform will bring along dividends generated by activated domestic consumption, institutional reform and a new round of globalization.
Zhang Monan, researcher at China Center for International Economic Exchanges (CCIEE).