Despite slowdown, China reform aims for long-term gains
Imagine for a moment that you could look into the economic future of China. What would you find in say five years? Some commentators talk of bubbles and crisis, but we see an economy with more diversified financial markets that welcome foreign participati
We also see a China that is comfortable with having a fully convertible currency and allows its citizens to invest overseas. In short, a nation with a leadership confident about opening up the country’s financial system and at ease with China’s place in the world economy.
But how will this happen? After all, the China of today is dominated by big state-owned banks and companies, a clogged-up credit system, hard to access stock and bond markets, interest rates that have yet to be fully liberalised and a currency that is only just starting to be let off a tight leash.
The answer is through reform. The country’s new leaders have made it quite clear that if the “Chinese dream” referred to by President Xi Jinping is to be fulfilled, the country needs to change.
This has major implications for China and the rest of the world, especially at a time when China’s economy is slowing down. In a recent speech broadcast to officials around the country, Premier Li Keqiang told his audience: “To achieve this year’s economic targets the room to rely on stimulus policies or government direct investment is not big – we must rely on market mechanisms. We must revitalise private investment and spending through deregulation and other reforms.”
Make no mistake, this shift away from export and investment driven growth that has served the country so well for three decades will not be easy, but the long-term rewards promise to be worth waiting for. Productivity will improve, domestic demand will become a much more important part of the economy and growth will be sustainable.
But in the short term this may involve some pain in the form of slowing growth, both at home and for China’s major trading partners.
The new leaders understand this. For example, despite a range of weaker economic numbers released this month, Beijing has shown little enthusiasm for launching new stimulus, indicating a greater tolerance for slower growth. And few disagree that financial and fiscal reforms are the only solution to local government debt, shadow banking and other structural problems.
The reform programme is likely to be gradual – as reforms in China almost invariably are – and will take time to filter through to the economy. As a result we have cut our GDP growth forecasts to 7.4 per cent from 8.2 per cent for 2013, and to 7.4 per cent from 8.4 per cent next year. Consensus estimates for both years are 7.8 per cent. The good news is the agenda for change is broad and, once implemented, the reforms should invigorate the private sector and improve efficiency, lifting growth prospects in the medium to long term. We think growth will rebound in 2015.
Talk of reform is one thing but actions speak louder than words. A recent meeting of the State Council, China’s cabinet, which is chaired by Premier Li, outlined nine measures to be introduced in 2013.
They cover everything from streamlining government by cutting red tape, promoting interest rate liberalisation and developing a plan for renminbi convertibility under the capital account, to launching a pilot programme to allow individuals to invest in overseas markets and measures to better regulate investment products such as bonds, stocks and trusts.
The aim is to reduce the role of the government in the economy, encourage private enterprise, give city migrants a better deal by gradually replacing the half century-old hukou (household registration) system and develop modern agriculture by protecting farmers’ land rights. Other measures include better medical service, public housing, food safety and environmental protection.
We believe 2013 will mark the start of an era of reforms led by the new government. A longer-term reform blueprint is likely to be announced at an important meeting of the Communist Party, which will probably be held in October.
We feel there will be no turning back. The old growth model is unsustainable and a healthy, balanced economy will benefit China and its trading partners. Further reforms are the only way forward.
This article was written by Qu Hongbin, Chief Economist, Greater China, HSBC.
