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Editor's note:
Growth may incur some pain. A "readjustment" may incur even more. Manufacturing activity has reached a new low. The A-sharestock market tumbled. GDP forecasts have been cut. Debt is piling up. China's economy is no longer going full steam ahead, driven by a fierce rise in land and property prices, or world-record increases in merchandise exports and foreign direct investment, or countless public projects funded by central and local governments. Where does the Chinese economy stand? What are its prospects for the rest of the year? What must it do to rebalance itself in a rebalancing world that is still dealing with a weak US recovery and struggling eurozone? China Daily asked some leading economists to share their views and explanations with our readers. From what they have said, however, one may also notice what they haven't said - that China is grinding to a halt; that nothing can be done to cure the economy's woes; and that China's leaders have taken the wrong path in their initiative to readjust the country's growth model. Instead, they all agreed that there should be more reform. |
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 Previous Issues:
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We downgraded the 2013 growth forecast further on weaker export growth. We cut China's GDP growth forecast further from 7.7 percent to 7.5 percent for 2013. Although domestic activities stabilized at a relatively weak level, May export growth dropped significantly and is expected to delay the overall recovery until the third quarter. While temporary factors like the base effect and the tighter scrutiny on export documentation are mainly to blame for the decline in export growth in May, weaker global demand and the stronger renminbi are likely to have a lasting negative impact. May credit growth slowed, with new total social financing, or TSF, moderating to 1.19 trillion yuan ($192 billion) and the growth of TSF outstanding (excluding equity) softening to 22.4 percent from 22.7 percent in April. We think the slowdown in credit growth has been mainly due to the tougher regulations on banks' off-balance sheet activities and shadow bank lending. As banks continued to expand loans rapidly, the central bank has tried to maintain a "prudent" policy stance, which contributed to the tightening of liquidity in the interbank market with money market rates rising fast.
With the government more tolerant of slower growth and controlling financial risk a key objective, we expect the government to keep the macro and property policies stable, with no additional easing such as rate or reserve requirement ratio cuts, nor significant tightening on property and credit. Meanwhile, we expect the government to push forward structural policies and reforms that can unlock autonomous growth in the economy. In the near term, more actions are to be expected to increase renminbi flexibility and open the capital account. The People's Bank of China seems to have intentionally withheld liquidity in the past two weeks to try to rein in credit growth, while regulators are reportedly preparing steps to clean up interbank activities. As such, money market rates may stay elevated for a while longer and credit growth may slow in the coming months. We also think there is an increased risk of an unintended liquidity crunch as some of the complex off-balance sheet activities unwind. 
Multiple rounds of quantitative easing by major central banks have resulted in abundant liquidity flooding the market, putting upward pressure on many emerging-market currencies and bringing a negative impact on their competitiveness and exports. In the case of China, the currency is no longer much undervalued from a basic current account balance point of view, with the current account surplus now only 2 percent of GDP, and the renminbi appreciating by more than 12 percent on a real trade weighted basis. As the quantitative easing policy may not end soon, it should indeed guard against further capital flow-induced appreciation, and prevent unexpected speculative capital outflows during the process of tapering off of quantitative easing. This is perhaps not the best time to simply let market forces, unleashed by zero interest rates and quantitative easing in advanced economies that cater to their needs, overwhelm economic fundamentals at home. That is why many economies have recently increased capital controls in order to reduce pressures on their currencies. 
In order to reduce arbitrage-type foreign exchange inflows, the central bank tightened regulations in May. We estimate that non-FDI net capital flows to China dropped from $40-50 billion in March-April to $9 billion in May. The official foreign exchange position at commercial banks, which includes FDI and current account flows, increased a mere 67 billion yuan in May, well short of the 300 billion yuan in April. The central bank is right in trying to rein in credit growth and to warn banks to properly consider liquidity and counter-party risks. We also think the regulators would be right in cracking down on reckless interbank and other type of regulatory arbitrage through which banks increase leverage, hide loans, bad assets and risks. These actions would force banks to either increase risk weighting, which consumes more capital that they may not have, or more likely, bring some of the off-balance sheet credit onto the balance sheet and crowd out other loans. Managed well, such actions should lead to a gradual slowdown in credit expansion and a reduction in financial risks.
-----Wang Tao chief economist in China at UBS AG |
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After disappointing activity data for the first five months of 2013, we recently revised down our GDP growth forecast. Momentum and sentiment are not very favorable at the moment, with exports weak, margin pressure keeping corporate investment subdued, and the government resisting calls for stimulus. We expect a modest recovery of (quarter-on-quarter) growth in the second half of the year, mainly because of a projected gradual improvement in growth in the US,Europe and Japan and its impact on China's exports and sentiment. We now project 7.5 percent GDP growth for 2013 as a whole and around 8 percent growth next year.
For the sake of long-term growth, China needs to rebalance the pattern of growth towards a larger role for domestic demand and services and improve the industrial structure. Some of the reforms are complicated and will take time, such as reform of the hukou (household registration) system and associated fiscal reform. Others can be implemented quicker and would also be good for growth in the short term. These include the government's attempts to encourage private investment, although success in this area calls for changing many existing rules, laws and traditions inhibiting the private sector. Other growth-enhancing reforms include removing barriers to service sector development and faster, higher quality urbanization.
An eventual tapering off of QE3 in the US is on balance good news for China, since it means that the Fed has concluded that economic growth in the US is strong enough to warrant a gradual return to normal monetary conditions. That is good for global growth, China's export prospects and global financial stability. We may see some more turbulence when international capital flows recede from emerging markets as a result of such tapering off, and this may also affect sentiment in China's markets. However, fundamentally, the direct impact on China of such flows receding should be very small, given China's capital controls and structural surplus on the balance of payments.
The pace of credit extension in recent years has simply been too fast. Much of the recent credit extension has been in the non-bank sector, the less well regulated part of the financial sector, and some of that carries particular risks. There is no other way: leverage needs to be reined in and regulation of non-bank lending tightened. Our empirical research and the precedent in 2011 suggest that reining in non-bank lending will affect growth but that the impact is much less than that of reining in bank lending. If supported by some pure fiscal expansion, the overall impact on growth should be modest.
-----Louis Kuijs chief China economist at the Royal Bank of Scotland and a former World Bank economist |
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It appears clear that China's economic growth will slow down, compared with previous decades. This is partly due to a fall in external demand and reduced growth of China's fixed investments, and partly due to the on-going economic restructuring and upgrading process. A GDP growth rate of 7 percent or something just above or below that rate is a less important issue. What matters is a more healthy and sustainable economy that is more efficient and domestically driven. China's leaders, especially the local ones, need to reduce their reliance on financial stimulus packages and focus more on market liberalization and improved employment levels.
Reducing bureaucracy, fighting against corruption and unleashing the private sector by allowing more access to the monopolized sectors such as telecoms and banking will provide China with a new round of impetus for strong growth. The new Chinese leadership is moving in the right direction by cutting down on the number of government approvals and curbing corruption. More swift, bold actions will be needed to maintain people's enthusiasm for participation. Providing a stable and predictable business environment and enhancing the rule of law are crucial elements for success. Building an environment that encourages innovation is also very important. 
The new US policy will be a blessing for China. Prices of raw materials are likely to fall and pressure on inflows of hot money into China will be lower. This will help China's imports of oil and much-needed minerals from abroad, and keep inflation at an acceptable level, thereby creating a more favorable external environment for the country to continue its economic transformation.
The greatest risk is that the speculated drain of capital may run out of control. If that happens, it will have disastrous effects on the economy. The government needs to take action to reduce the tax burden on businesses, especially small and mini-sized operations, and provide more financial and policy support to small and medium-sized enterprises, while maintaining the level playing field between State-owned enterprises and the private sector. In the meantime, it also needs to reduce intervention in the economy and leave the market, not local government, to play a more significant role in resource allocation. This will not only ensure more orderly market conditions but also reduce the rate of bad debts and unscrupulous investment.
-----Allan Zhang director of PwC China Advisory |
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It is very likely that China's GDP growth in the next five years will slow down. From the experience of other Asian economies that followed a similar growth strategy as China (e.g., Japan, South Korea, Hong Kong and Taiwan), it is hard to maintain a double-digit growth rate for a prolonged period. China is close to the structural economic slowdown experienced in these countries or regions. Depending on the Chinese government's willingness to undertake structural economic reforms, economic growth could decline to between 6 and 7 percent. A challenge is how to avoid a financial crisis when the economy slows.
In the long run, I would suggest that the government should remove entry restrictions for sectors that are highly regulated, such as the financial, telecommunication and energy sectors. Allowing private enterprises to compete in these sectors will increase economic efficiency and promote economic growth. In addition, the government may want to enforce the protection of intellectual property rights (IPR). I have several friends in the United States that would like to open startup companies in China. However, their plans have been postponed due to the lack of appropriate financial services and concern about IPR protection. In the short run, appropriate investment in public facilities in smaller cities may help to absorb excess production capacity due to weak global demand. 
The Fed's policy depends on US economic conditions. An exit from quantitative easing or a reduction in the amount of asset purchases reflects the stronger economic recovery in the US. If such a strong recovery coincides with China's economic slowdown, we may see capital flows from China to the US and depreciation pressure on the yuan.
The internationalization of the yuan is not an appropriate strategy at this stage for China. Instead, China should consider stepping up its capital controls. As I mentioned earlier, it is very likely for an economy to experience a financial crisis when going through a structural economic slowdown. The likelihood of such an event is quite high for China. Therefore, the internationalization of the currency and capital account liberalization could turn out to be a deadly mistake. To avoid such a scenario, I would suggest that China reform its financial markets before opening up the capital account. -----Jian Wang |
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China's economic growth in the second half will be slower than the first half. The downward trend will be consistent in the whole year.
Consumption will add impetus to China's economic growth and measures should be taken to boost spending, especially on big-ticket items such as cars and energy-saving appliances. Stable macroeconomic policies need to be maintained in the long run, but in the short term, policymakers could fine-tune monetary tools such as bank reserve requirement ratios and interest rates to affect liquidity.
If the US Fed starts to scale back quantitative easing, it would help to ease the appreciation pressure on the yuan and strengthen the dollar's value, which would be good for China's trade. The US economy is picking up. The housing and financial markets are getting better. I expect the Fed will gradually end its quantitative easing as well as its ultra-low interest rates by the end of the year or in the first half of 2014. If the US changes its zero-interest rate policy, the imported inflationary pressure facing China would be eased and China would have more room to adjust its macroeconomic policies especially its monetary policy. 
The current cash crunch in China's money markets is largely a structural issue. Enterprises have entered an intensive payment period, but some companies have poor balance sheets due to the economic slowdown and their ability to repay the loans was relatively weak. The cash crunch is largely caused by pressure on repayment, but not a shortage of overall liquidity. The risks of local government debt and the shadow banking system will depend on China's economic growth trend. If the economy could maintain stable growth and companies could turn falling revenues to sustainable growth, the risks could be managed, but if the economy continues to slow, the risks might be augmented.
-----Chen Dongqi deputy director of the Academy of Macro-Economic Research at the National Development and Reform Commission |
