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Analysts: China has to solve complex problems on the way to new economic model

09:15 | 13.03.2016 | Analytic

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13 March 2016. PenzaNews. International observers closely monitor the annual session of China’s highest legislative body – the National People’s Congress (NPC), after which the plan for economic and social development of the country for the 2016−2020 will be accepted.

Analysts: China has to solve complex problems on the way to new economic model

Photo: Wikipedia.org

According to the government report, China sets its growth target for 2016 in a range between 6.5% and 7%.

“In setting a projected growth rate of between 6.5% and 7%, we have taken into consideration the need to finish building a moderately prosperous society in all respects and the need to advance structural reform. It will also help guide market expectations and keep them stable,” said Chinese Premier Li Keqiang.

According to him, a comprehensive analysis of all factors shows that “China will face more and
tougher problems and challenges in its development”, including weak trade growth, fluctuations in the financial market, rising geopolitical risks, as well as a number of internal problems associated with structural adjustments and growing pressure on the economy of the country.

However, the Chinese Premier stressed that there are no insuperable difficulties for the country.

According to the plan for economic and social development, China will keep macro policies stable, carry out more proactive fiscal policy and restrained monetary policy. The government will intensify financial sector reform, increase the effectiveness of investment, set up new mechanisms for responding to financial risks, cut overcapacity, and carry out reform of state-owned enterprises.

It is expected that special attention will be paid to environmental issues. The NPC deputies discuss a law on environmental protection taxation, the core goal of which is to encourage enterprises to cut emissions.

Moreover, Chen Jining, China’s minister of environmental protection, stressed the need to promote environmentally friendly and highly efficient use of coal, reduce raw coal consumption, and encourage the shift from coal to gas and electricity.

Commenting on the results of the main economic event in China, Francisco Cafiero, President of Latin American Centre for Economic and Political Studies of China, reminded that in 2015 China experienced 6.9% growth of its GDP, the lowest growth rate since the 1990’s.

“The rate is slower than other years, but China is still growing three times more than the USA and four times more than Europe. The two-digit economic growth rate of China in the past years is primarily due to all of the foreign investment received and the growth of the exports,” the expert told PenzaNews.

According to him, with the international financial crisis of 2008 China received less investment, and at the same time the income from the exports also decreased.

“In order to overcome this situation, a change of the economic policy was made to become more internal domestic market oriented,” Francisco Cafiero explained.

He also added that by 2020 the Chinese government wants to reach a double digit GDP and the GDP per capita to again achieve the figures of 2010.

“In order to accomplish this, it is presumed that the growth rate must be around 6.5% annually, this is difficult to achieve due to the low growth rate of the global economy. However, China maintains the highest monetary reserve of the world, which could be injected in the economy in order to achieve the objective originally mentioned,” the analyst said.

Moreover, he noted that China is also establishing areas of free trade in Shanghai, Guangdong, Tianjin and Fujian provinces, and in Beijing, testing the idea of bringing foreign investors in the area of services.

“China is the motor of the global economy, that’s why it can sustain high levels of growth, and is key for the growth of other countries,” Francisco Cafiero stressed.

In turn, Michael Pettis, one of the leading experts on the Chinese economy, Professor of Finance at Guanghua School of Management, Peking University, reminded that every country that has had a long period of very rapid growth driven by surging investment has always had to follow with a very difficult adjustment during which it has to cope with burgeoning debt.

“In China it is proving to be no different. China was supposed to begin rebalancing its economy in 2007, according to a promise during a speech made by then-premier Wen Jiabao, but in fact it proved too politically difficult to overcome the opposition of the ‘vested interests,’ and the imbalances got worse until around 2011–2012,” the analyst said.

According to him, under the leadership of Xi Jinping China has slowly begun rebalancing the economy, but it still has a very long ways to go.

“The historical precedents suggest that the only countries that are able to manage the substantial reforms that China must implement are either democracies, which tend to adjust very well, or highly centralized autocracies, in which it is possible to overcome elite resistance to the reforms. That is why, in my opinion, it is very important that Xi Jinping has begun to take steps to centralize authority considerably. He is still in the process of consolidating power and during 2016–2017, if Xi Jinping is successful, I think Beijing can begin aggressively to implement the reforms proposed during the 2013 Third plenum,” the professor said.

As Beijing tries to get control of the growth in debt, GDP growth rates will continue dropping, he suggested.

“Either we will see GDP growth drop rapidly by 1% or more every year over the next few years, or growth will temporarily stabilize at current levels, but the result will be continued rapid increase in debt, which is growing 2–3 times as fast as GDP,” Michael Pettis added.

If the Chinese economy slows consistently every year without a crisis, which, in his opinion, is the most likely outcome, it will be positive for the world, especially for manufacturers in developing countries, he said.

“But whether growth drops consistently or chaotically, I expect the prices of hard commodities, such as industrials and metals, will remain low and will probably drop even further. Overall until the problem of income inequality in the US, China, and most of the rest of the world is resolved, I expect global demand will be weak for many years,” the analyst said.

Meanwhile, Douglas Paal, Vice President For Studies at Carnegie Endowment for International Peace, noted that China is in the beginning stages of a difficult transition from an investment-led to a consumption-led economy.

“This has huge ramifications for dealing with past excess investment and resulting overcapacity, including unemployment, subsidies, and retraining,” the expert explained.

He also reminded that China has an overhang of debt from the post-global financial crisis stimulus period.

“Working this out will also slow growth, even as Chinese overseas markets are slowing. Lower commodity prices are nonetheless helping China maintain trade surpluses that give the state room to manage these various stresses and more,” the analyst said.

Speaking about the most important domestic policy plans of the country, he stressed that making state owned enterprises truly competitive and shutting down excess capacity are two sides of the same policy coin.

“The vested interests of these enterprises make this politically challenging. Separately, but equally important, China is changing the metrics for performance of its officials at basic levels, from rewarding fast growth and quick earnings to rewarding environmentalism, measured growth, and more stable fiscal practices. This is changing fundamentally the politics of local governance,” the expert said.

In his opinion, there is a tremendous amount of passive resistance in the Chinese system to the needed reforms.

“China will contribute substantially to global growth, but at nowhere near the scale of the previous 10 years. Corporate strategies that rely on rapid Chinese growth, for example foreign auto makers, will need to ratchet back their ambitions,” Douglas Paal added.

In turn, Kerry Brown, Professor of Chinese Studies and Director of the Lau China Institute at King’s College, London, suggested that the current situation in the world’s second-largest economy is full of uncertainty.

“Growth is falling quicker than was expected. Shanghai stock exchange is highly volatile. Business confidence inside China and then towards china outside is confused, and less strong than at any time in the last decade. The government seems stuck between on the one hand wanting to allow the market to decide everything and on the other simply intervening,” the expert explained.

From his point of view, the most important objectives of China’s 13th five-year plan are to support more services sector as part of GDP, to raise domestic consumption, and to have the country follow a green environmental plan.

“But China is still in transition, so they cannot totally move from export orientated manufacturing growth,” the analyst stressed.

According to him, China wants to transit to a higher value economic model.

“It no longer wants to be the manufacturer for the world, but the service provider and user to the world. It needs to build a credible domestic financial sector, to serve its all-important emerging middle class. But that is a huge tough thing to try to achieve on such a scale and so shortly. Especially as China does not have an effective rule of law at the moment, and because of its political model,” Kerry Brown concluded.

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