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Concrete reforms for more balanced growth in China

Publication Date : 06-03-2014

 

China will let market forces play a bigger role in the world's No. 2 economy and also boost domestic consumption to achieve this year's 7.5 per cent economic growth target, Premier Li Keqiang has promised.

In his first annual work report as China's top economic policymaker, Li laid out concrete reforms that could help put the slowing economy on a more balanced, sustainable growth path.

These include opening up state-dominated sectors to private investors, new steps that pave the way for liberalising interest rates, and boosting consumer spending and services.

Analysts say these steps would not only benefit local private entrepreneurs but also open up opportunities for foreign investors eager to tap the country's push towards a more high-tech, services-driven economy.

They also say that the key items in this year's people-oriented Budget - from job creation to science and technology - reflect this shift in economic structure.
"China is seeking to upgrade its economy, so there is a greater need to spend on nurturing talent and building up innovative capability. The budget this year reflects such priorities," said Beijing-based public finance researcher Huang Wenjing.

Such a move comes not a moment too soon as China's investment-driven model is showing clear signs of strain.

Overcapacity has built up in heavy industries like cement, while a lending binge to stimulate the economy drove up prices of assets like property. Local governments are saddled with some 18 trillion yuan (US$2.9 trillion) of debt used to fund their building spree.

The economy grew by 7.7 per cent last year, the same as 2012, which was the lowest since 1999.

This year, a median forecast of analysts polled by Reuters showed that the growth rate could drop to 7.4 per cent - the slowest pace in 24 years.

Chinese think-tanks like the influential State Information Centre had earlier suggested lowering this year's growth target to 7 per cent so as to focus local officials' energies on deeper reforms like improving social welfare and income distribution while freeing up resources for greener growth.

Li's decision to stick to a 7.5 per cent target, used since 2012, suggests that Beijing sees this pace as key to its goal of creating 10 million more urban jobs this year, up from last year's "over nine million" goal.

The target is also "beneficial to strengthening market confidence and improving the economic structure", Li added.

Confidence is shaky for now, after reports yesterday that China could see its first bond default if loss-making solar equipment maker Chaori Solar is unable to make interest payments on bonds due tomorrow.

Jitters over a possible financial crisis in China intensified after a three billion yuan trust product narrowly avoided default in January.

Fears that such financial instability could trigger a wide economic meltdown prompted Li to reassure markets that growth will remain on an even keel, say analysts.
"The 7.5 per cent target sends a strong signal to the provinces that while the central government is pushing for some painful reforms, it will still guarantee a certain level of growth," said Standard Chartered analysts Li Wei and Stephen Green in a note to clients yesterday.

If all goes according to plan, investment growth will moderate to 17.5 per cent this year, from 19.6 per cent last year, which far exceeded the target of 18 per cent.
Retail sales could accelerate to 14.5 per cent, up from just 13.1 per cent last year, indicating a bigger role for domestic consumption.

To boost consumers' spending power, Beijing has earmarked 715 billion yuan to support social security and employment - the second biggest item in this year's budget after defence spending.

It represents a nearly 10 per cent spike from last year, amid growing pressure to secure jobs for China's record 7.27 million college graduates expected this year and to provide adequate safety nets for its fast-ageing population. Li also laid out specific targets, from setting up a deposit insurance scheme to slashing 42 million tonnes of cement overproduction, to demonstrate that he is backing his reform talk with action.

The word "reform" appeared 77 times in his address, exceeding the 56 times his predecessor Wen Jiabao used in his first work report in 2003, reported the official China Youth Daily.

"The plain language used in Premier Li's report makes it easy for the people to understand the government's plans, unlike premier Wen's report, which was more theoretical," said delegate He Junming from Sichuan province.

 

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