How can China prevent a slowdown from turning into a hard landing?

China Daily | Updated: 2012-05-25 08:18

Editor's Note: Never has the challenge been so great for managers in China whether they work with assembly lines owned by international companies or services catering for domestic customers.

How can China prevent a slowdown from turning into a hard landing?

And never has the need been so strong for exhibitions of balance and care among government officials and their economic advisers.

Both of those statements are true because the Chinese economy has never been faced with so difficult a task - shedding its old, export-led model of growth and building a new one relying primarily on domestic consumption.

Only two months ago, China's biggest fears were over the possibility of lingering inflation. But now, as Premier Wen Jiabao said twice earlier this week, a greater concern is the prospect of too great and too abrupt of a slowdown.

Can the second largest economy of the world maintain its balance? If so, how? How can China maintain a good growth rate while steering clear of the twin obstacles of sky-rocketing prices and investment bubbles?

China Daily posed four questions in this vein to five prominent economists:

Feng Fei

director-general of the development research center of the State Council's research department of industrial economy and a guest economist of China Daily

The foundation of stimulus policies, Keynesian theory, has played an important role in helping the country cope with the financial crisis, but it also could lead to inflation or even stagnation.

Now is the time to consider its opposite, supply-side economics, which was adopted by Ronald Reagan in the United States in the 1980s. Deregulation, reforms to the economic system and a market more open to private capital should be at the top of the list of priorities.

Meanwhile, the government should continue to make structural reforms in two ways: by greatly easing the tax burden on small businesses and by adopting favorable tax policies for strategically important emerging industries.

Policymakers should further reform their investment and monetary policies to better reflect supply and demand. These measures will operate much like herbal medicine, which takes a long time to produce its benefits but has few side effects.

The lower-than-expected inflation seen in the first quarter (at a rate of 3.8 percent) was in line with the slower economic growth (at a rate of 8.4 percent). If a bigger priority is to be placed again on economic growth, inflation will be under greater pressure as well. Food prices are a big contributor (to inflation), but rising labor and resource costs will have even bigger effects. China is gradually losing its demographic advantages, a change that will pose long-term difficulties related to inflationary pressures in China.

The regulations imposed on the real estate market are unlikely to change quickly, even though a slower real estate industry and slower steel and non-ferrous metal industries did prove to be a drag on economic growth in the first quarter.

It's true the government is faced with a difficult choice. The regulations have yet to be effective or meet customers' expectations. Since real estate regulation is not only an economic issue but also a social one, the control policies shouldn't be relaxed at this point.

I strongly suggest that the government adopt more targeted and effective measures to curb speculative behavior - for instance, strictly restraining house sales by substantially increasing sales taxes.

Expanding domestic demand shouldn't be seen as a short-term remedy that merely has the purpose of expanding domestic demand, but as a long-term strategy.

Consumption could be boosted in the short term with the use of incentive policies meant to encourage purchases of new-energy vehicles and energy-efficient household appliances. But without improving household incomes, increases in consumption cannot be sustained.

Liu Yuanchun

deputy dean of the School of Economics at Renmin University of China

At present, China's economy is approaching the bottom. I think it will probably hit bottom in May.

The slowdown has taken longer to come about than we thought, since difficulties that the government did not overcome in past years are becoming more serious. Certainly we need to further loosen policies to shore up the economy, but a little fine-tuning would be more acceptable, especially with uncertainties existing in the monetary policies of Europe and the United States. We are better off to stay prudent in the current circumstances and firmly reject any offer of a new stimulus package.

While the economy is slowing down, there are also obvious signs of a rebound. If we adopt a large-scale loosening at this time, the market's natural pace of recovery will be interrupted. Instead of redirecting its policies, the government should pay more attention to proceeding with reforms for the medium- and long-term while keeping the economy stable in the short term.

If we don't believe in the market's ability to repair itself and simply trust the power of government intervention, we'll probably only find ourselves trapped in short-term turbulence.

Although China's consumer price index continues to moderate, inflationary pressures still exist.

As we know, the country has already entered a period of price hikes propelled by rising costs. In addition, commodity prices will be highly affected by large economies' oil reserves and the international situation. All the conditions point to the same conclusion: in the medium-term, inflationary pressure (at a likely rate of 4 percent) will be quite normal for the economy.

Macroeconomic policies, especially monetary policies, will have the important goal of keeping inflation under control. The only difference now is that the economic slowdown is becoming a top concern.

The ongoing fine-tuning is also leading to appropriate loosening of lending related to the property sector, while keeping purchase limits untouched. China could encourage lending to buyers of first homes, or even second homes, while watching closely how some large real estate developers obtain capital in order to prevent a failure among them from harming the economy.

In the short term, it will be necessary for the government to take quick measures to deflate investment bubbles. But, in the long run, it should try to support a reasonable amount of demand for property, and the best way to ease real estate prices is by increasing supply.

The government is promoting sales of home electronic appliances and construction materials in rural areas, which will boost domestic consumption to some extent. I expect there to be more deregulation for some industries to allow private investment to play a bigger role. Some important projects under construction, affordable homes and railways, should receive more credit.

As fiscal revenue is increasing at a much slower pace, the government is less likely to try to spur the economy by cutting taxes. Instead, it has more space to increase fiscal expenditure in some areas. I think a deficit ratio of 2 percent would be proper, judging from the current situation. That means an officially set deficit of 800 billion yuan ($126.2 billion) is not enough and it should be increased to about 1.1 trillion yuan.

Liu Shangxi

deputy director of the Fiscal Science Research Center at the Ministry of Finance

Stimulus to simply make the GDP growth figure look better would be unnecessary, as the current economic situation is not yet in the worst shape as seen during the 2008 crisis, when the government conducted a massive stimulus package.

To evaluate the real economic situation, a key indicator to be monitored is the employment rate, rather than GDP and other data, and the job market looks fine at the moment.

During the 2008 crisis, many businesses stopped hiring because of shrinking orders, but what we've seen recently is employers paying higher salaries to get staff, which means that business activities are still robust.

I wouldn't call the current surge in consumer prices "inflation", as the CPI was mainly pushed up by the prices of food such as vegetables and pork, which account for a large percentage in the basket.

Changes in food prices are not really the result of excessive liquidity; thus, further monetary tools wouldn't be the best choice in curbing prices.

A major reason for surging vegetable prices is that much farmland has been converted as a result of the urbanization process, which has forced farmers to relocate far from cities, leading to an increase in logistics costs.

To effectively reduce food prices, the government needs to work on building more vegetable planting bases and reduce logistics costs.

There is absolutely no need to remove the curbs on the property market, as housing prices will rebound, if policies show any signs of relaxing.

The property market will not return to the track of sound development unless it experiences a definitive "break".

Local governments may look for the relaxation of real estate policies as a result of their own interests, but top-level decision makers, based on general considerations, won't loosen controls in the near term.

Many are hoping that restrictions will be lifted as the property tax pilot program is expanded. However, the two aren't actually interchangeable, and the limits won't go unless more speculative capital is wrung out of the property market.

A proactive fiscal policy would be beneficial for boosting domestic demand, but a massive stimulus similar to the 4-trillion-yuan package in 2008 is no longer feasible. The policy focus should be more on structural tax cuts rather than investment incentives.

Incentives should also focus more on reducing the tax burden for small and medium-sized enterprises, creating a friendlier environment for start-ups at the grassroots level, and strengthening professional training for employees.

Fiscal support should be directed more to benefit consumers rather than producers, and public spending should be more people-oriented.

Wei Jianguo

secretary-general of the China Center for International Economic Exchanges and a guest economist of China Daily

The economic slowdown is under way, but the hardest time of the year has yet to come. I think the economy will follow a downward trajectory until the fourth quarter, amid dim global prospects.

Whether Greece will exit the eurozone and the aftermath is uncertain. In case Greece exits, which personally I think is very likely, what would that mean for Germany, France and other eurozone members. Problems may easily flare up in the area and bring more uncertainties to China as the EU is China's largest trading partner.

The US economy has gradually rallied, but largely due to the lingering impact of the last round of quantitative easing instead of organic growth, and the US never ruled out further quantitative easing.

The economic outlook for (China's) neighboring countries such as Japan and South Korea is not very optimistic as well.

I'm not inclined to large-scale stimulus plans. Policy adjustment should tilt toward expanding exports and supporting small to medium-sized enterprises.

Meanwhile, the government should expand support for State-owned companies because they are pillars of the real economy, and give great importance to countering further economic recession.

Last year, the country was under great pressure from imported inflation caused by soaring global oil and grain prices and adverse weather.

The slipping (inflation) figure showed that the government's regulation was effective. Inflation remains a problem but not a major concern in the coming months.

Prices of steel and agricultural products will continue to decline in the coming months along with the economic slowdown.

Consumption remains weak and customers are reluctant to pay more. Given lethargic market conditions and abundant supply, I think the deceleration of inflation is likely to continue.

Real estate should follow government-dominated regulation, but market regulation is also necessary. A weak real estate industry has affected downstream industries including steel, cement, household appliances and furniture.

I think it's a good time to moderately relax the regulations. The country should accelerate construction of affordable low-cost housing to bolster the economy and appropriately relax regulations on commercial property and property in some areas.

The government should further lower import taxes on luxury goods to promote domestic demand and boost trade. Cutting tariffs is crucial in fanning rich consumers' enthusiasm to buy such products domestically.

Also, measures need to be taken to bolster consumption of low-income people by expanding investment in rural areas. The country should make more effort in building a better social security system, housing system and education system to free consumers from worry and gradually upgrade their consumption structure to higher levels.

Wang Jun

Deputy Director-General of the Consulting Research Department of the China Center for International Economic Exchanges

The government is stepping up easing efforts at a modest pace as the pressure of the country's cooling economic growth is increasing.

Premier Wen Jiabao urged the country to pay more attention to "stabilizing economic growth" at a meeting of the State Council on Wednesday, which was expected to accelerate the policy fine-tuning more forcefully.

The Chinese growth outlook remains difficult, while the economic situation is becoming more complicated than expected.

The GDP growth rate for the second quarter may slow to less than 8 percent and industrial output may show single-digit growth. That may push the central bank to cut the benchmark interest rate in the third quarter.

However, there is no need to suddenly, completely loosen policy, because a moderate slowdown is necessary for economic restructuring.

Along with price declines for food and international commodities, inflationary pressure is likely to continue reducing during the third quarter, leaving more space for the authorities to loosen monetary policy.

Because of cooling economic growth, manufacturers' input and output prices are also on track to decline.

Inflation may slightly rebound in the fourth quarter because of seasonal factors, but it is possible that the full-year CPI can be held below 4 percent.

Tight housing policies have effectively curbed both the transaction volume and prices in recent months, which has limited investment and associated consumption, such as interior decoration and furniture.

The weak real estate market is also the main force behind the current sluggish economic situation, which may need a slight fine-tuning in the coming months

The policy easing may include loosing credit controls and reducing the down payment for first-home purchases. Local governments may have policy flexibility depending on changing conditions.

A better choice to boost domestic consumption is to ease fiscal policy. The expansion of fiscal expenditure on improving living standards, developing the energy-conservation and emission-reduction industries and supporting small businesses can be seen as the most effective methods.

Existing policies for encouraging consumption are not strong enough, amid the fast decrease of exports. Household incomes should be raised soon, on a larger scale.

At the same time, tax cuts are necessary to boost employees' incomes and increase demand, especially for export-oriented manufacturing companies, which are having a difficult time with the eurozone contraction set to deepen and the US economy likely to decelerate in the second quarter.

(China Daily 05/25/2012 page14)