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2 China
tweaks tools for a soft
landing By Willy Lam
Just as in the political and social
arenas, the economic focus of the Hu Jintao-Wen
Jiabao administration in 2012 will be upholding
stability. In view of factors including the
eurozone debt crisis - which will impact on
China's exports to Europe adversely - top priority
is being put on preventing a hard landing of the
economy. The big question for this year is, with
the Chinese Communist Party (CCP) leadership
preoccupied with holding the fort, will new
initiatives still be introduced to attain the
long-standing goal of rationalizing and reforming
the economy?
The tension between
preserving stability and furthering reforms has
been highlighted by Beijing's efforts to prevent a
hard-landing of the economy. Recently announced
figures by the State
Statistical Bureau
showed China's gross domestic product (GDP) grew
year on year by 8.9% in 2011, down from the
comparable figure of 9.1% for 2010. In
anticipation of a further economic downturn, a
series of high-level financial meetings held by
the party and state leadership in December
recommended a significant loosening of the
country's tight monetary policy.
For
example, the ''loan target'' for 2012 - the extent
of credit that Chinese banks are allowed to extend
to domestic enterprises - is fixed at 8 trillion
yuan (US$1.27 trillion), or 500 billion yuan more
than that of 2011. And the M2 money-supply growth
rate is set at 14% compared to 13.5% the year
before. The newly available credit - which could
be used to prop up the stagnant housing market as
well as to finance more infrastructure-related
ventures - represents a continuation of the
much-criticized strategy of realizing GDP
expansion through state investment.
Despite the obsession with stability and
the penchant for sticking with time-tested means
to re-inflate the economy, this year could be a
watershed in the Chinese Communist Party (CCP)
administration's long-standing effort to
restructure the economy. Major targets for 2011 to
2015 have been laid down in the 12th Five-Year
Plan (12FYP) released in late 2010. Traditionally,
the second year of every five-year plan is deemed
crucial for its satisfactory completion.
While Executive Vice Premier Li Keqiang is
not expected to become premier - and China's
economic czar - until March 2013, the key protege
of President Hu's was already given more authority
over economic planning and ''macro-level
adjustment and control'' (hongguan
tiaokong) early last year. To both consolidate
power and boost his national stature in the run-up
to the 18th Party Congress in late 2012, it is
possible that Li will map out far-reaching
economic strategies in the coming months.
Similarly, other prospective Politburo
Standing Committee (PBSC) members with known
ambitions to reform the economy, such as Vice
Premier Wang Qishan, also might want to turn the
current crisis into an opportunity for showcasing
their talent for ushering in new solutions.
The foremost indicator of China's economic
health - and the sustainability of the so-called
Chinese economic miracle - will be the extent to
which domestic consumption will play a bigger role
in GDP expansion. For some 30 years, the CCP
leadership has depended on government cash
injections - mainly fixed-assets investments in
infrastructure, housing and other areas - in
addition to exports as engines of growth. In the
past decade, government outlays have consistently
taken up at least 50% of GDP.
Indicative
of the leadership's determination to retool the
economy is the frank admission by President Hu
last month that "at this stage of China's economic
development, questions of imbalance, lack of
coordination and unsustainability are still very
pronounced".
In spite of the consensus
within the leadership that the key to sustainable
growth is boosting domestic spending, household
consumption as a percentage of GDP has declined
from 50-odd% in the 1980s to just 34%. To
encourage Chinese - particularly workers and
farmers - to spend more, the government has
repeatedly raised the minimum wage as well as
social-insurance payouts. For example, Beijing
pledged at the outset of the 12th FYP that
worker's income will increase annually at least at
the same rate as GDP. Medical insurance, once
available only in the cities, has the past few
years been extended to more than 90% of rural
townships and villages.
Yet the main
reason behind Chinese consumers' tepid spending is
that the bulk of the wealth generated by the
"world factory" in the past two decades has gone
to state coffers as well as yangqi
conglomerates, state-owned enterprise (SOE) groups
that are directly controlled by the party-state
apparatus. Equally detrimental to consumers'
spending power is the deliberately low interest
rates set for Chinese citizens' 80-odd trillion
yuan's ($12.7 trillion) worth of bank deposits.
This has resulted in the equivalent of up to 7% of
GDP being siphoned off annually from households to
benefit government banks and their SOE borrowers.
Moreover, for the past decade or so, the
salaries of workers as a proportion of GDP have
fallen by an estimated 1% each year. Whether
Premier Wen and Vice Premier Li will roll out
policies to reverse the trend of "rich state; poor
citizens" (guofu minqiong) is a good
yardstick of Beijing's commitment to rationalizing
the economic structure and promoting more
equitable income distribution.
Two related
areas where seminal developments may take place
this year with significant impact on economic
reform merit scrutiny. One is the globalization of
the renminbi, or yuan. The renminbi's
internationalization will mean not only that it
will be freely convertible but also that its
valuation will be less subject to state fiats. The
yuan appreciated by 4.27% against the US dollar in
2011. Full liberalization will make for a higher
rate of appreciation. While this may hurt exports
in the short run, it also will lessen Beijing's
dependence on trade surpluses as a locomotive of
growth.
Moreover, a freely convertible
yuan will expedite the development of Shanghai and
other mega-cities into international financial
centers. Equally significantly, a stronger yuan
will boost consumer spending in view of the fact
that imports will become significantly cheaper.
Yet a tug-of-war has erupted within the
central government over the pace of yuan
globalization. The Ministry of Commerce and other
departments close to China's powerful export
section do not favor a drastic reform of the yuan.
It also is not surprising that many experts have
spoken out against a faster pace of currency
reform. For instance, Huang Yiping, Economics
Professor at the China Center for Economic
Research at Peking University, noted in New York
last week that it would be hard to argue the yuan
was undervalued when China's trade surplus was
only 2% of GDP.
There are indications,
however, that more forward-looking officials are
toying with bolder visions. Several senior
government officials and advisors have the past
year leaked to the overseas media rough
"deadlines" for the yuan's internationalization.
These have ranged from 2015 to the end of this
decade. Premier-in-waiting Li will have no better
platform for demonstrating his reformist
credentials than a resolute and speedy resolution
to the long-standing question of the
internationalization of the Chinese currency.
The other touchstone of Beijing's
commitment to economic liberalization is whether a
brake will be put on the disturbing trend of
guojin mintui, or the state sector making
advancements at the expense of privately owned
enterprises (POEs). "In recent years, China seems
to be embracing state capitalism more strongly,
rather than continuing to move toward the economic
reform goals that originally drove its pursuit of
WTO membership," said the US Trade
Representative's Office in its annual report on
the Chinese economy. The enhanced status of the
state sector is a major reason why China was
ranked a lowly 138th in the Heritage Foundation's
annual world index of economic
freedom.
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