China’s Structural Reforms Prevail, Despite Tough Global Landscape by Dan Steinbock, Difference Group

During the on-going “Two Sessions” – the annual plenary meetings of China’s top legislative and consultative bodies – international spotlight focused on the 13th Five Year Plan, poverty alleviation and the charity law, the rule of law, the Belt and Road initiative, green development, and the anti-corruption struggle.

From the standpoint of the market economy, the structural reforms play the most critical role in China’s transformation, however.

China’s structural reforms against the new normal

In the past few years, President Xi Jinping’s priority agenda – the “Four Comprehensives” – has become the grand blueprint of China’s new five year plan. The most critical tenet of the agenda stresses the task of building a “moderately prosperous society.” The second task is to “deepen reform” which requires reducing government’s role by increasing market power. The third priority is the “rule of law” and the fourth stresses strict party discipline.

Deeper reforms are vital to achieve the rebalancing of the Chinese economy toward consumption and innovation. The challenge is to implement those reforms amid the “new normal,” the most challenging world economy since the 1930s.

Nevertheless, at the 2015 Central Economic Work Conference, the policy authorities pledged to focus increasingly on supply-side reforms, which prioritized the reduction of excess capacity, while maintaining stability.

In the coming months, that will mean expanded fiscal spending, further monetary easing and broad restructuring – as evidenced by the Two Sessions.

Balancing between growth and reforms

In 2015, China’s economy grew by 6.9 percent. The deceleration of growth signals the eclipse of industrialization in the mainland’s relatively wealthier provinces. Moreover, slower growth is vital to double Chinese living standards by 2020. That’s what Premier Li Keqiang underscored when he stated that China will not abandon its ambitions for growth, although it will not pursue GDP single-mindedly.

Beijing’s objective is not sheer growth for growth. Rather, growth is seen as an instrument to raise living standards.

Despite shifts in the budget, reform priorities prevail. China budgeted a fiscal deficit of 3 percent of gross domestic product (GDP) for 2016 from 2.4 percent in 2015, to support a “reasonable range” of growth. At the same time, China hopes to maintain social expenditure and infrastructure investment, including increasing the length of high-speed railways to 30,000 km, linking more than 80 percent of big cities nationwide, and achieving full coverage for broadband networks in both urban and rural areas.

Moreover, defense spending was budgeted to rise 7.6 percent, which represents a significant decrease from 10.1 percent last year. Neither represents a disruptive change; both reflect the ongoing balancing act.

In the past few years, Primer Li Keqiang has pushed structural reforms but shunned another huge stimulus, which would contribute to government debt. He favors smaller, targeted fiscal measures. In turn, gradual deleveraging seeks to reduce local government debt, which accumulated after the 2009 stimulus.

Undoubtedly, the most serious signal that the government is resolute about reforms is the pledge to reduce excess capacity even if it will require 3 million workers to be laid off in the coming 2-3 years.

Growth by fundamentals, growth by debt

Internationally, China’s balancing act – the effort to couple structural reforms with rebalancing of the economy – is something unique.

Today, U.S. sovereign debt exceeds $19.1 trillion and the size of the economy. Europe has been struggling with massive sovereign debt crisis since 2010 and most core economies rely on debt-fueled growth. In Japan, Premier Abe’s agenda has contributed to the debt burden, which is now almost 250 percent of the GDP. Washington still lacks of credible, bipartisan mediumterm debt-reduction plan. Brussels lacks institutions to implement such plans regionally. Japan has a plan but it continues to contribute to debt.

Without effective growth, major advanced economies rely on ultra-low interest rates (U.S.), continued quantitative easing, or both (Europe, Japan). In contrast, China is engaged in a structural transformation, even as it is deleveraging.

The new range target of 6.5-7 percent growth for 2016 is ambitious but feasible. Assuming peaceful international environment and gradual domestic reforms, it is likely to further decelerate to about 5 percent by 2020. Assuming advanced economies can avoid contagious debt crises, U.S. annual growth is unlikely to exceed 2.5 percent, Eurozone expansion will remain less than 1.5 percent and Japanese growth will struggle at 0.5-1 percent. But that is growth by debt.

In contrast, China has potential to grow 2-3 times faster than major advanced economies, as long as market-oriented structural reforms will prevail. And that is growth by fundamentals. Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). For more, see www.differencegroup.net

China's Economy - The Sum Of The Parts Featured