Editorial: China’s Stabilizing Economy Offers Leaders a Window of Opportunity for Reform
China’s economy grew 6.9% in the second quarter, according to latest official figures, continuing its recovery momentum after the gross domestic product (GDP) growth rate fell to 6.7% in the first three quarters in 2016.
The second-quarter figures, released by the National Bureau of Statistics last week, are better than the market’s estimate, indicating the resilience and potential of the Chinese economy.
While uncertainties remain on the world stage, and long-term structural problems linger in China, the stabilizing economy has provided a precious window for reform. That will pave the way for further economic development.
The market had been divided over the prospect of the economy before the official figures were released. Some were optimistic, predicting the start of a new cycle. Others believed that the Chinese economy, despite its positive start, would end low this year.
No matter which side ends up being correct, this isn’t a time to celebrate.
The current GDP and investment growth rates are still near their lowest levels since 2010. Although industrial output, consumption and export data appear positive, investment is still cool, with the growth of investment in fixed assets showing clear signs of slowing down. In addition, investment still highly relies on infrastructure and property. But as the housing market cools off, its contribution to economic growth has been lessening. Also, the country’s economic restructuring still is moving slowly, and operation costs for enterprises remain high because of the relatively high leverage rate in the real economy. The Chinese economy is still under considerable downward pressure.
Central bank officials are pointing out that risks have recently been accumulating in bad loans, liquidity crunches, shadow banking, property bubbles, government debts and technological financing. Such warnings are not exaggerated.
We cannot ignore the economic and financial risks. Besides taking measures in response, the authorities also need to push forward systemic reforms in order to prevent future trouble. China should take the chance when the economy stabilizes and financial risks are under control to make sure reform plans are carried out. It’s time to break the “timing-of-reform paradox” that often stalls reform progress — when the economy struggles, some people doubt China’s readiness for reform; but when the economy stabilizes, the pressure for reform often weakens.
The National Financial Work Conference, which takes place every five years and was held last week, decided to create a financial stability committee and heightened the People’s Bank of China’s responsibility to watch out for systemic financial risks. The meeting also clarified the financial regulators’ roles in overseeing the markets, and imposed stricter accountability systems. Authorities have chosen to make a solid step in the right direction.
Reform to financial regulation systems is vital and urgent. The current system was formed in 2003, in which the central bank, the China Bank Regulatory Committee, the China Securities Regulatory Committee and the China Insurance Regulatory Committee take care of their own parts of the financial markets. However, the setup that used to play a significant role has been showing some weakness in recent years. In the face of mixed business operations, especially with the rise of internet-based financing businesses, the regulators find it hard to do their job, leaving financial risks to grow.
In 2013, the State Council established a cross-ministry coordination joint meeting system led by the People’s Bank of China. But the effect has been limited because the regulators still hold on to their own turfs despite attending the coordination meetings several times a year. The stock-market and bond-market turmoil that came and went in recent years shows that adding patches on the original system were not effective in preventing risks. To solve the outstanding problems in financial regulation, systemic reform is needed, and regulation based on industry or organizations needs to be changed to regulations on functions or behavior.
Details on the structure and functions of the State Council’s financial stability committee have not been disclosed. But it’s vital for authorities to coordinate the reform of financial systems and regulations; plan as a whole currency, fiscal, industrial and other policies; and enhance the authority and effectiveness of coordinated regulation.
Debates on financial regulation reform have been going on for years, with rumors surfacing now and then. An earlier decision to establish a financial stability committee was necessary because financial risks will not wait. Upgrades can be made in future changes. Authorities can pay more attention to systemic arrangements based on lessons learned from the past so as to avoid problems over power and responsibilities and time needed to make decisions. The making and fine-tuning of financial laws and regulations should be their top priority.
Besides reform in financial areas, change needed in state-owned enterprises, land and fiscal systems also should accelerate. The financial work conference last week emphasized deleveraging the state-owned economic sector and cleaning up the “zombie” companies that have been losing money for years because of overcapacity in their sectors.
Whether reforms are successful will be tested by whether they solve problems. Only after the deep-rooted problems get fixed will the Chinese economy be able to switch to new driving forces and embark on a healthy and sustainable development path.
Hu Shuli is the editor-in-chief of Caixin Media.
Founder & Publisher, Caixin Media
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