Editorial: Over-Optimism Mustn’t Derail China’s Reform Push as Economy Warms Up
There are diverging forecasts on China’s economic outlook. Those with a rosier view believe the economy is very close to bottoming out and growth is likely to pick up steam next year. The International Monetary Fund (IMF) has raised China’s 2017 growth forecast four times this year, supporting the sanguine sentiments. But positive expectations have also triggered speculation on policy tightening, which has rocked bond and futures markets recently.
Some cautious analysts warned against over-optimism as China’s third-quarter gross domestic product (GDP) growth slowed for the first time since 2016, although the 6.8% growth beat market expectations. Many institutions have forecast that China’s 2018 growth may further cool and fall below the 6.5% forecast by IMF.
There are reasons to be optimistic. For instance, the IMF said the world economy is recovering and is expected to grow 3.6% this year, up 0.4 percentage points from last year. The United States and the eurozone are both improving. In China, reforms to cut oversupply and financial leverage have had positive effects, promoting efficiency, new business growth and consumer market development.
But we should be aware that the economic recovery of China and the world are still fragile, especially given the fact that demand from emerging markets are declining and that the direction of U.S. macroeconomic policy remains uncertain. A major shift of monetary policy across the globe is likely to bring more risks to the world economy.
Cyclical factors are also affecting the stability of China’s economy, where structural and institutional problems still exist. This poses more challenges to risk mitigation efforts. While China’s economic achievements deserve praise and confidence, over-optimism is worth guarding against.
This year, China’s economy has shown greater seasonal variation. The frequent fluctuation of economic performance within a month has affected market sentiments, although the monthly average indexes remain stable.
Effects of some short-term policies that previously fueled China’s recovery are gradually disappearing. For instance, the policy to offer cash compensation to people affected by shantytown renovation projects encouraged house-buying and slowed the decline of property investments during the first half this year. But the surge of housing sales also exhausted the market and was followed by a sharp decline in sales from August. Infrastructure investment is also under pressure as government spending slows amid tightening control on local governments’ borrowing activities.
Some structural issues that have long restrained China’s economic development haven’t been fixed effectively. Structural reforms including reducing the glut of coal, steel or cement and stricter environmental requirements have pushed up prices of industrial products and beefed up profitability. But despite this overall improvement, companies, especially privately owned ones, are still hesitant to invest in manufacturing.
Since the beginning of the year, the leverage ratio of manufacturers has declined steadily. However, the liability ratio of local government-backed companies has continued to rise since August. Cutting these companies’ debt piles is still a challenging task that is crucial to taming the debt risks of local governments and companies.
According to recent economic data, Guizhou province and Chongqing municipality — which have been the growth engines in western China — have both registered slower growth in the third quarter compared to the same period last year, posing questions about the sustainability of their investment-driven growth model. Meanwhile, provinces like Shanxi, Shaanxi, Guangdong and Zhejiang have recorded faster growth, fueled by different factors that include the recovery of commodity prices or the emergence of new growth engines.
It is clear that the Chinese economy has entered “a new normal” of slower growth, which requires policymakers to focus more on the quality and efficiency of the economy. At the recently concluded 19th National Party Congress, GDP growth rate is no longer a key target in China’s policy agenda. Instead, the top leadership stressed “adequate and balanced development,” marking a clear shift from previous times. China is putting more emphasis on promoting domestic consumption, innovation, greener development, the sharing economy and talent cultivation to create new engines of growth and to move its economy to the higher end of the global value chain.
Achieving these goals require a greater reform push, especially in areas such as debt risk control and leverage reduction. Although China has set up institutional arrangements to regulate local debt, it still needs an effective system in which local and central governments’ responsibility and rights are clearly and fairly defined. More efforts are also needed to improve the performance assessment systems for officials and to enhance coordination among different regulators.
In the fight against excessive financial leverage, state-owned enterprises (SOEs) are still playing a crucial role. It is not only because they are the main targets for overcapacity cuts and risk control, but also because SOE reform will create more space for private investment in areas dominated by the state and beef up market confidence. Reducing leverage requires accelerating reforms to the financial regulatory system and the SOE sector.
In the real estate sector, China has moved to launch various reform pilot programs this year such as shared ownership to increase housing supply and the encouragement of rental-market development. But it still needs a long-term arrangement to effectively manage the fluctuations in the housing market.
The recoveries of the Chinese and world economies have created a window of opportunity to deepen reforms. To overcome the constraints on its long-term growth, China must fix some long-existing issues that have hindered its development. Whether China can achieve sustainable growth and move up the global value chain will be decided by its commitment to reform and willingness to act. Neither pessimism nor over-optimism will help.
Hu Shuli is the editor-in-chief of Caixin Media.
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