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China: Reforms, Not ‘Forceful Stimulus,’ Will Boost Economy

  • Shannon Van Sant

Workers clean windows near Apple's retail store in Beijing. China reported an unexpected contraction in exports in March, raising the danger of job losses as Beijing tries to overhaul its slowing economy, April 10, 2014.

Workers clean windows near Apple's retail store in Beijing. China reported an unexpected contraction in exports in March, raising the danger of job losses as Beijing tries to overhaul its slowing economy, April 10, 2014.

China’s leaders say they will not use “forceful stimulus” to boost their economy, at a time when there are indications that growth is slowing more than the government expected. The government has used massive state-backed projects in the past to boost growth. Authorities say they will stick with their economic reform plans that are aimed at building stability for the future.

Over the last year President Xi Jinping has unveiled a series of reforms to keep China’s economy from losing momentum, but those reforms may not be enough to maintain economic growth.

Gross domestic product is forecast to have grown by 7.3 percent in the first quarter, and some economists believe China will fall short of the government’s official target of 7.5 percent for this year.

“If no reform is carried out, no good reforms are carried out, the economy may face very serious risk,” stated Economist Ran Tao, a senior fellow of the Brookings Tsinghua Center.

On Thursday, Chinese Premier Li Keqiang said authorities are focusing on promoting healthy development in the long term, instead of short-term measures aimed at boosting flagging growth.

Economist Ran said one of the biggest reform challenges is a real estate bubble, which he said is already starting to burst. The government is attempting to implement policies that will minimize two other risks to the economy: local government debt and the country’s shadow banking system.

David Dollar of the John L. Thornton China Center said leaders’ chief challenge will be overcoming the objections of opponents of their reform plan. “There is a lot of opposition to specific pieces of that plan,” he said.

Those opponents include some of China’s powerful state-owned enterprises. By some estimates 150,000 state owned enterprises in China control 50 percent of industrial assets and employ 20 percent of the nation’s workforce. These government owned and operated companies are large, but they are not as efficient as their counterparts in the private sector.

Authorities recognize that these inefficient enterprises should be changed, but Ran said reform is not happening quickly enough. “State enterprise reform, you know breaking the state monopolies in some key sectors which still have under capacity I think the progress has been very slow,” he noted.

Breaking monopolies may be hard for the government, but additional stimulus measures are not. Tax breaks for small and mid-sized companies, accelerated financing for infrastructure projects and support for public housing construction are among the measures announced last week that may help smaller companies while also boosting the overall economy.

China’s leaders are also trying to curb corruption, a goal that may also be served by reducing financing for large infrastructure projects, said Tsuinghua University professor Bai Chong-en. “One speculation is that corruption is easier when you engage in big projects," he explained. "It’s harder to collect money from street vendors. It’s easier to collect money from a huge construction company.”

As President Xi and other top leaders push for reforms aimed at making Chinese companies more competitive, and the economy less dependent on state spending, economists say they need to move with urgency because risks continue to build in the system.

Economist Ran predicts huge problems if meaningful reforms are not carried out in two to three years. “Hard landing, maybe large scale financial crisis and also an economic crisis,” he said.

For now, Chinese leaders are pressing for reforms while also warning against overly pessimistic views of the country’s economy. In a commentary published this week, China’s Xinhua News Agency said “there is no need to panic, not least because China’s growth rates remain high compared with the recent sluggish standards of Western nations.”
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