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catoismymotor (38.90)

"...China’s economy would grow at a healthy 7.5pc this year."

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June 12, 2009 – Comments (2)

China needs to loosen grip on economy to sustain growth, experts argueChina must dare to empower private enterprise and create a new service sector if it wishes to maintain economic growth as the world emerges from global recession, a panel of finance and banking experts in Beijing have warned.

Telegraph.co.uk

By Peter Foster in Beijing

Published: 2:42PM BST 10 Jun 2009

Despite the impressive impact of China's £400bn stimulus package economists said that massive government spending on bridges, railways and universal health insurance would not be enough to create sustainable growth in the coming decade.

Figures released at the spring meeting of the Institute of International Finance (IIF) in Beijing on Wednesday predicted that China’s economy would grow at a healthy 7.5pc this year.

After a disastrous last quarter of 2008, rising house sales – up 9pc in the first quarter of 2009 from a year earlier - as well as fresh figures showing that 90pc of migrant workers who returned to work in January had now found jobs, all pointed to a Chinese recovery.

“We now see the signs that the downturn in China has bottomed out and is now on the path to recovery,” said Gerard Lyons, chief economist at Standard Chartered Bank, “however, as the Chinese authorities acknowledge, the crisis is not over yet.”

Chief among the fears of an elite panel of experts and investment managers speaking at the IIF conference was whether China would take the long-term measures necessary to rebalance its economy and boost domestic demand in the face of a long-term decline in exports.

Louis Kuijis, senior economist for the World Bank in China, said that China had performed “very respectably” through the financial crisis, but added that China would not be immune to the long-term impacts of the global recession.

China must not fall into the trap of focussing on maintaining 8pc growth at all costs – the figure which China’s communist leaders often say is necessary to maintain social stability – but should now focus on social and economic reforms that would sustain growth in the medium term.

He added that a financial structure which relied on government-related investment to generate one third of GDP was not sustainable, particularly with the wider global economy facing a long, shallow recovery.

“We believe that China’s elemental competitiveness is very strong and that China will continue to gain market share in the global economy,” he said.

“However we believe that China cannot continue to grow in isolation from the global economy and that the decline in exports will shave two per cent off annual GDP growth over the next five years, which is a significant number.”

Faced with a decline in export demand for the foreseeable future, China must take difficult steps to create a new, private-sector dynamism in its still heavily state-controlled economy, concluded Arthur Kroeber of the Beijing-based Dragonomics consultancy.

“If China wants to maintain its 8pc GDP growth there needs to be a replacement found for the productivity growth that has been lost in the export sector.

“Ultimately what this will require is a deregulation of the service sector and significant reform in a financial sector that is set up to reward capital expenditure and heavy industry but does not serve the private sector or private enterprise at all well.

“The problem is that control of the financial sector is central to maintaining the current political order in China. Reform will take power away from the state and put it in the hands of the private sector actors and that leaves the state with less and less control,” he said.

On a pessimistic view the Chinese state would be unwilling to sacrifice political power for economic efficiency gains, Mr Kroeber added, with long-term negative consequences for China’s emergence as a world economic power.

However optimists - a camp in which Mr Kroeber included himself - would point to the story of the last 30 years of economic reform in China and say it showed China’s communist leaders had, time again, showed they were willing to cede direct control over more and more parts of the Chinese economy.

2 Comments – Post Your Own

#1) On June 12, 2009 at 11:29 AM, catoismymotor (38.90) wrote:

This offers some good news to those of us that are bulls in the China shop. I believe when more Chinese students return from western universities to join the economy more positive changes will occure.

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#2) On June 12, 2009 at 1:15 PM, catoismymotor (38.90) wrote:

Fine. Here is something for the haters.

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