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China Heading for Soft Landing?

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China Power

China Heading for Soft Landing?

China’s economic growth has picked up. But big structural challenges remain.

China’s statistics chief said today that it would be a ‘good result’ if the country were able to achieve 10 percent growth this year, with an about 3 percent rise in consumer prices.

Speaking at the World Economic Forum Annual Meeting of the New Champions being held in Tianjin, Ma Jiantang was upbeat about the country’s prospects for growth, and dismissed suggestions that an overheating property sector could lead to the collapse of the Chinese economy.

According to the official Xinhua News Agency: ‘The growth in China's gross domestic product slowed to 10.3 percent in the second quarter from 11.9 percent in the first quarter, triggering concerns about China's economic slowdown.’

But it went on to quote Ma as explaining that the 11.9-percent increase in the first-quarter GDP was ‘largely due to lower comparison base last year when the nation was hit hardest by the financial crisis.’

Ma’s comments came after an upbeat set of economic data released at the weekend. According to figures released Saturday, industrial production rose 13.9 percent last month on a year earlier, while retail sales and lending beat most economists’ forecasts.

So, is the economy really returning to something like the shape it was in pre-economic crisis?

According to Alistair Thornton, China Analyst at IHS Global Insight, broadly speaking the answer is yes — but there are still potentially serious problems ahead. I asked him what he made of the weekend data, and he told me that he thought overall it showed a continuation of the gradual stimulus withdrawal that Beijing has been enacting since early this year.

‘Investment is pulling back to more “normal” levels, and exports and retail sales are starting to pull their own weight,’ he told me. ‘Policymakers are trying to exit the stimulus cycle whilst engineering a soft landing, and August's data suggests that they have have been successful thus far. Consumer price inflation isn’t a threat at present, and output has stabilised.’

‘They deserve congratulations for yanking the economy out of recession-territory in late 2008/early 2009, and for weaning it off stimulus without risking the broader recovery.’

Mark Williams, senior China economist with Capital Economics, agreed that despite warnings from some quarters over an inevitable, destabilizing surge in inflation, there’s so far little to suggest that this is happening.

‘Inflation pressures still seem very low’, he told me. ‘There was a small increase in the headline rate due to what's been happening to food prices. But apart from food, prices are stable. So there really is no evidence that China is overheating.’

Williams told me that Capital Economics estimates suggest the pace of economic growth has already dropped to 8 to 9 percent, which is significantly less than the average in recent years. ‘In these circumstances, it seems odd to talk about the economy overheating,’ he told me. ‘I believe that the problem is quite the opposite: the government is still having to use policy stimulus just to keep growth at that subdued level. Without it, growth would dip even lower and unemployment would shoot up as a result.’

But Thornton said that although policymakers have earned themselves ‘some breathing space’, they’ll need to use this time to enact reforms that will ensure future growth.

‘It has been all hands on deck fighting the global downturn, and now that has been dealt with, it needs to be all hands on deck “rebalancing”. This is the biggest risk through the medium-term — that they can’t muster enough political capital or political will to force through the necessary reforms,’ he told me. ‘The goal, as is often repeated, is to increase consumption as a share of GDP, thus reducing the surplus and foreign exchange reserves. This means dialing-down investment spending and boosting consumption.’

And to help see this happen? Thornton said the banking sector ‘needs a thorough going-over, liberalising interest rates and enhancing risk management practices to remove skewed incentives towards investment-heavy state-owned enterprise lending’.

He said SOEs needed to be either broken up ‘or forced to pay back their huge profits to society via dividends’.

Williams agreed that state-owned monopolies probably need to be broken up, and also agreed that there are serious structural issues for Chinese policymakers to address.

‘The government still hasn't made a serious attempt to address the issue of how Chinese consumers are going to take over as the long-run driver of Chinese economic growth,’ he told me. ‘Stimulus spending is all very well in the short term, but at some point, big structural issues need to be addressed.’ He suggested removing the subsidies on energy and land that big firms now enjoy, allowing the currency to strengthen so as to boost consumers spending power and raising interest rates ‘so that it makes more sense to hire workers than borrow to buy machines.’

So does he see it happening? Unfortunately not anytime soon, as too many may have an interest in keeping things as they are. ‘I'm sceptical that we will see much of this,’ he told me. ‘All of these steps would undermine the position of those big, often state-owned, firms that have prospered under the status quo. They are powerful enough to stifle reform.’