China Growth Focus Faulted

Economic reforms are needed for long-term goals.
By Michael Lelyveld
2013-01-14
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Cargo containers are lifted at Huangye Port in Cangzhou, Hebei province, Jan. 8, 2013.
ImagineChina

China is showing mixed signs of economic health as it mounts a recovery from slower growth rates last year.

The latest hints of a speedup have been seen in several sectors since the economy hit a low point with 7.4-percent gross domestic product (GDP) growth in the third quarter, according to National Bureau of Statistics (NBS) data.

December exports jumped 14.1 after edging up only 2.9 percent in November from a year earlier, the General Administration of Customs reported.

Average prices of new homes in a 100-city survey rose by a scant 0.03 percent in December, the China Real Estate Index System said. But the gain was the first year-on-year increase in nine months, The Wall Street Journal noted.

Last week, leading steel producer Baosteel raised its prices for the third consecutive month, citing higher costs for imported iron ore, the official English-language China Daily reported.

Futures prices of reinforcing bars for construction climbed to a five-month high, Bloomberg News said.

In another indicator of activity, oil demand hit an all-time record of 10.5 million barrels per day in November, according to Platts energy newswire.

Isolated reports from the property sector also suggest bullishness at the end of last year. Top developer China Vanke Co. said December property sales doubled from a year before, the official Xinhua news agency reported.

Cyclical upturn

While the evidence is still spotty, forecasts call for a modest rebound to higher growth. GDP will rise by 8.1 percent in 2013, up from 7.8 percent last year, a report from Tsinghua University's Center for China in the World Economy said.

Most forecasts for the coming year range between 8 and 8.5 percent, said Yukon Huang, senior associate in the Asia program at the Carnegie Endowment for International Peace.

But some of the hoopla over rebound forecasts should be tempered by the seriousness of last year's slowdown, said Derek Scissors, senior research fellow in Asian studies at the Heritage Foundation in Washington.

Although official data estimates that growth only slipped into the 7-percent range during the depths of the slump, Scissors said it may have dropped as low as 3 percent.

The real extent of the slowdown may make the recovery look like a sharp turnaround.

"The cyclical upturn looks pretty strong because growth is spiking up from a lower level than was acknowledged, so people are getting a little carried away with the cyclical upturn because it does look like quite a rally," Scissors said.

Managing the comeback

But few expect a return to the double-digit expansion that dominated the past decade.

Concern about the delicate balance between cyclical pressures has given rise to recommendations for managing the comeback with monetary "fine-tuning."

A small interest rate cut and modest changes to bank reserve requirements could reduce financing costs and boost profits, said researchers from China Development Bank, the State Information Center and Shanghai Securities News, according to Xinhua.

Short-term fixes

But the focus on short-term management of the recovery misses the point, Huang said in an interview.

"China is entering essentially a different phase," he said. "It's a new environment, one in which they cannot continue to increase investment as they have in the past to keep demand going."

Debt levels of local governments and private companies have increased, so that bank lending is not the cure-all that it used to be. Local investment opportunities are not as attractive as they once were, Huang said.

Investment is no longer expected to grow at 10 percent or more per year and may struggle to rise at half that rate, he argued.

Despite the export gain in December, trade is unlikely to spur the economy, either, as long as world markets remain sluggish.

Consumption growth has held steady in the range of 8 percent, but the much-heralded transition to a consumption- led economy also has problems.

Wage growth has slowed, raising concerns that the consumption boom may fizzle.

"You do have the danger that personal consumption falls from the 8-percent robust growth in the past to something like 6 or 7," Huang said. In that case, 8-percent economic growth might not be sustainable.

GDP growth of 8 percent is generally seen as the level China needs to meet its demand for adding new jobs.

While China's new leaders will feel pressure to tinker with monetary and fiscal policies, the greater challenges will be to raise productivity for wage growth and shift more of the economy to the private sector, said Huang.

Private sector growth

Scissors also sees promotion of private sector growth as a solution for China.

While policy recommendations have focused on the amount of liquidity that could be added to the economy, the existing liquidity in the system is vast because many state-owned corporations have been propped up with subsidies and loans.

"Basically, a great number of Chinese corporate entities should go out of business, and they don't because there's so much money floating around," Scissors said.

Financing for loss-making corporate giants could be used more productively in the private sector, but China has put off reform and consolidation of its state-owned enterprises for years.

"Until you deal with that, the structural trend is declining, even though you're in a cyclical upswing," said Scissors. "It's a spike while you're on a downturn," he said.

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