Guest Contributor at SAIS Washington
The lowest annual GDP growth over the past 14 years, coupled with chronic imbalances and potential bubbles, made observers worry that the Chinese economy is running out of steam. Last November’s Third Plenum unveiled a comprehensive roadmap aiming to rebalance the economy and push forward further reforms. The Chinese leadership apparently knows what is going on and has initiated a new march that promise to transform the country for the better.
Beijing has shifted its emphasis on targeted growth to structural reforms. The Twelfth Five Year Plan (2011-2015) lowered the official year-over-year GDP growth rate to 7%. In reality, average growth reached 8.2% over the past three years, a figure that still takes the lead among major economies. The excessive 1.2% implies leeway for more challenging reforms such as cutting carbon emission and reducing energy consumption. To some extent, a lower growth rate reflects persistent reform while the opposite indicates returning to the previous investment-driven model.
Compared with statistical indicators, the market worries more about the effect of structural reforms, accumulating credit risk and potential housing bubbles. Policymakers are well aware of the concerns and have taken steps to address them.
The new round reform kicked off by adjusting the one-child demographic policy, one that confronts fewer barriers. Financial reform is represented by the Shanghai Free Trade Zone, a policy similar to the Special Economic Zone in the 1980s that seeks to further open up service industry and eliminate financial repressions. State-owned enterprises and rural land reforms have also been initiated in experimental provinces.
All these policies will shift China’s growth to a sustainable path driven by domestic consumption. Given China’s ever pluarlization of interests, it takes longer to coordinate and implement all these policies. Considering Beijing’s consistent pragmatism and incremental path, people should have confidence that further detailed plans will be released.
What really troubles the leadership is the interconnection of ballooning credit injection and overheated housing market. A crux of China’s model is that every time when policymakers attempt to constrain the credit, subsequent slowdown force them to back off and add new fuel, causing soaring M2/GDP ratio and housing prices.
It’s time to change this mindset. Last year, China’s central bank took measures to reduce leverage by guiding the interest rates steadily higher, which culminated in a temporary liquidity shortage in the interbank lending market. This episode demonstrated that the new leadership was willing to focus more on the healthy long-term gain. The State Council released a regulatory framework on the widely-pervasive shadow banking system and required financial institutions to maintain stringent capital sufficiency. While the housing bubble may remind people of the crisis in the US or Japan, China’s rapid urbanization, much-less reliant on housing mortgages and rigid demand from the middle-class all mean the situation is not identical.
Over the past three decades, China’s overall economic performance has defied expectations of many. While history may not be definitive to the future, it is at least suggestive.