With the Central Economic Work Conference just concluded, the important task facing the 2014 Chinese economy seems to be twofold: balancing China’s medium and long-term reform with its short-term growth, and balancing its structural adjustment with control and prevention of possible risks. On such a basis, efforts are to be made to launch, at an opportune moment, anticipated reforms in the various areas.
Zhang Monan
The year 2014 will see China start its comprehensive deepening of economic structural reform, as well as enter into a new period in which reforms and risks are interwoven more intricately. After all, reform can never be smooth sailing. We must recognize that our reform may not necessarily deliver short-term growth, and that China’s economy will unavoidably go through throes of transition characterized by growth slowdown and structural adjustment. This, consequently, will make “risk control” a more important objective in China’s 2014 macroeconomic policy.
From a medium and long-term perspective, resource allocation in China as a whole will become more and more efficient along with implementation of the various reform policies. But in short run, reforms in certain sectors may cause considerable interruption to short-term growth and prices. Take resource pricing reform for example, deepening reform will require changes in resource prices, associated taxes and fees, establishment of a compensatory use system that reflect market demand and supply, resource scarcity, ecological values and damage to future generations. Yet, with resource products being underpriced for so long, it is highly likely that the proposed resource pricing reform will lead to price hikes, causing factor costs of enterprises to go up and predicament of the real economy to get worse.
What is more, if we truly give the marketplace a decisive role in resource allocation, the government must let go its excessive hold on resource-related factors and the growth model featuring government-led investment must also taper off somewhat. Yet, if for some time the growth drivers can not be connected orderly, as relay athletes drop their baton in the race, then China might find itself in a “neutral gear” trap in which the country gets no drive for continued growth.
Therefore, an important task facing the Chinese economy in 2014 is to balance the need for advancing medium and long-term reform with that for securing short-term growth, and to balance its structural adjustment with risk control and prevention. This is a challenging task before China’s economic planners.
With respect to macroeconomic objectives. We did not find the Central Economic Work Conference mention this. But, by stating that one must recognize the relationship between sustained development and GDP growth, seize every opportunity to ensure a reasonable GDP increase while advancing economic structural adjustment and achieve a speed that features higher quality and efficiency without entailing any after-effect, the conference released certain signals, such as highlighting the importance of a rational growth and playing down GDP as a criterium to judge official performance.
The greater tolerance of a slower growth by the incoming government has made the ceiling of expected growth in China lower. Yet, to reach the goal of doubling the country’s GDP by 2020, we must have an annual growth rate of around 6.8% at minimum. China’s macroeconomic growth target set for 2014 is likely to be 7%, which could be the average for potential annual growth rate in the coming five years. A slower growth in quantity should, in my view, be accompanied by a greater improvement in quality. This requires that we do a good balancing job in finding new growth drivers so that we can secure a benign cycle from introducing reform, to improving structure and achieving steady growth.
With respect to fencing off financial and debt risks. Compared with most developed countries, China’s overall leverage ratio is still quite low and remains relatively secure, moderate and controllable. Yet, since China’s debt has risen rather rapidly during the international financial crisis, the room for further increase has become smaller, making debt risks anything but neglectable. According to statistics, China’s matured local debt in 2013 totaled 3 trillion yuan, up by 60% from the previous year and accounting for roughly 50% of the local fiscal revenue. As local financing platforms will soon have a concentrated debt maturity period, the amount of debt to be paid will increase sharply in the coming two years. But fiscal revenue is unlikely to increase as sharply, subjecting local governments and their financial platforms to greater pressure from debt repayment. This also means that systems of local financing and investment, as well as state-owned capital management, might come under a big overhaul. According to an estimate, roughly 2.9 trillion yuan worth of trust fund in 2014 will face the pressure from maturity and possible roll-over. Capital chain will be severely tested. We should give risk control our top priority and be good at holding the bottomline against systemic financial and debt risks.
With respect to macro policy options. We should keep to the premise that the direction of macroeconomic policy will stay unchanged. Yet we may have to use fewer policies that affect the aggregates and more policies that are structural and functional in nature. Because structural policies can often to a certain extent offset the downward pressure in the economy. For example, a flexible use of rediscounting, reloaning, SLF, differentiated required reserve ratio and other tools can keep liquidity at a rational and appropriate level, and a structural tax reduction can bring down overall taxation level in the economy and help energize the enterprises.
With respect to finding key reform areas for breakthrough. In striking a balance between short-term growth and medium and long-term structural adjustment, greater attention perhaps can be given to reforms of the supply side and those geared to greater indigenous drive. In the past two years or so, we have seen a clear dichotomy in China’s economy and financing sector, with the former receiving less and less attention and the latter more and more of it. Particularly since the beginning of 2013, an ever rising financing aggregate and substantial increase in off-balance sheet financing and securities financing are accompanied by continued slowdown in growth rate and macroeconomic output. The contrast between a much favored virtual economy and a unwelcomed real economy cannot be more glaring.
To reverse the mistaken allocation of financial resources, therefore, we must reshape the virtual-real economic relationship. Our financial reform should focus on a strategy of serving economic transition and upgrading and increasing total-factor productivity, give greater support to the real economy through multiple financial markets, financial innovation and better integration of production and financing, and constantly improve the efficiency of fund use and capital allocation.
Last but not least, the Central Economic Work Conference called for reform for a long-term mechanism to overcome the problem of overcapacity and an open economic structure. Such reform can go a long way to promoting the economic structural adjustment which in turn can improve the economy’s medium and long-term capacity of supply.
Zhang Monan is a researcher at the Strategic Studies Department of the China International Economic Exchange Center.
