CDT Money: World Bank Report Outlines Reform Path
The World Bank published a nearly 500 page report Monday, co-authored with a government think-tank, which prescribes a roadmap of reform for the Chinese economy as it enters the next phase of its expansion. From the foreword of the report, penned by World Bank chief Robert Zoellick and Development Research Centre of the State Council president Li Wei:
The idea behind this study was developed in 2010, at the celebrations for the 30th anniversary of the China–World Bank partnership. To commemorate that milestone, President Zoellick proposed to Chinese leaders to work jointly on identifying and analyzing China’s medium-term development challenges looking forward to 2030. Together, China and the World Bank would conduct research drawing on lessons from international experience as well as China’s own successful development record, and prepare a strategic framework for reforms that could assist China’s policy making as well as guide future China–World Bank relations. China’s state leaders welcomed and supported the proposal.
The report is based on the strong conviction that China has the potential to become a modern, harmonious, and creative highincome society by 2030.
In order to reach that objective, however, China must change its policy and institutional framework. China’s next phase of development will need to build on its considerable strengths—high savings, plentiful and increasingly skilled labor, and the potential for further urbanization—and capitalize on external opportunities that include continued globalization, the rapid growth of other emerging economies, and promising new technologies. At the same time, China will need to address a number of significant challenges and risks, such as an aging society, rising inequality, a large and growing environmental deficit, and stubborn external imbalances.
The report touches on a number of avenues for reform, including a reduction in the influence of state-owned enterprises, an emphasis on green development, and the improvement of China’s social security and other safety nets, all with an aim to helping China manage its economic transition and not fall into the “middle-income” trap. Zoellick held a news conference in Beijing on Tuesday to discuss the report, where one lone protester disrupted the event with “Occupy”-style slogans before security personnel dragged him away. Still, Chinese media welcomed the findings – One opinion piece in The China Daily applauded the potential dialogue the author hoped the report would facilitate, while another suggested that China is well placed to implement the suggested reforms.
High-ranking Chinese officials, including Vice Premier Li Keqiang and Finance Minister Xie Xuren, also chimed in to stress the importance of accelerating economic restructuring and promoting innovation. With the Chinese People’s Political Consultative Conference (CPPCC) and National People’s Congress (NPC) just days away from opening their annual sessions, however, the Economist warned that World Bank officials and other observers should take the rhetoric of reform with a grain of salt:
The bank, however, should be prepared for disappointment. In the buildup to the party congress, a bit of reformist posturing is only to be expected. Different factions in the party want to air their agendas in order to influence the policy choices of the new leaders. A hint of this emerged in a commentary in the People’s Daily (in Chinese) on February 23rd. It said some officials wanted to keep things as they were in order to avoid criticism, but that this would eventually result in an even greater crisis. “No matter how thorough plans are, or how intelligently crafted they are, reforms will always be attacked,” it said, giving warning that mere “tinkering” with reform had been the downfall of great nations and parties.
China’s new leaders will likely take at least a few months to consolidate their power and settle in before they feel confident enough to tackle economic reforms that affect powerful vested interests, such as the bureaucracy that controls state enterprises or the ministry of commerce. (Nicholas Lardy of the Peterson Institute for International Economics in Washington, DC, describes the influence of these groups in a detailed chapter in his new book, “Sustaining China’s Economic Growth After the Global Financial Crisis”). Even then, it is very unlikely that those who take over leadership of the party in a few months’ time will be any stronger than their predecessors when it comes to taking on the conservatives.
Arvind Subramanian, an Indian economist who made waves with his 2011 book about China’s path to becoming the world’s top economic power, gave his thoughts on the report during a Q&A interview with The Wall Street Journal:
What did you think of “China 2030”?
I was pleasantly surprised. I give them credit for fundamentally saying the way forward is to move qualitatively away from the status quo. The report said you had to reform. But what the report didn’t say is ‘How much of reform requires political change?’
The $1 million question is how much change can you bring on without bringing down the political scaffolding? How much more controlled reform can you do? The more reform you do, the more you bring down the scaffolding.
Spotlight: 2012 Growth Target
Premier Wen Jiabao kicked off the NPC’s annual session today by giving his annual work report and setting a GDP growth expectation of 7.5% for 2012, the first time China has set its sights below the 8% mark in the past eight years. The Wall Street Journal reports that the target signals that China intends to focus more on the quality rather than the speed of its economic expansion, and indicates a willingness by Beijing to accept slower growth in exchange for a more balanced development profile:
In his government work report to the NPC, Mr. Wen said the government aims to contain consumer-price inflation at around 4% this year. Last year, the consumer-price index rose 5.4%, above the official target of within 4%.
He also reiterated Beijing’s official line of maintaining a prudent monetary policy and a proactive fiscal policy, and set a 14% growth target this year for M2, China’s broadest measure of money supply.
“We aim to promote steady and robust economic development; keep prices stable; and guard against financial risks by keeping the total money and credit supply at an appropriate level and taking a cautious yet flexible approach,” Mr. Wen said.
For updates, insights and analysis as the NPC opens in Beijing, see The Wall Street Journal’s live blog of the proceedings.
Manufacturing Data Beasts Estimates
Elsewhere, an expansion in export orders contributed to better-than-expected February manufacturing data, as China’s official purchasing managers’ index (PMI) registered its highest level since September. The overall figure, which saw its third straight monthly gain, indicated that the resiliency of Asian economies may be helping China’s factories to manage the export strain caused by Europe’s debt crisis. While the People’s Daily hailed the news as a sign of economic stability, however, Financial Times’ Josh Noble cautioned against an overly optimistic reaction to the data:
Although the government’s purchasing managers’ index registered its highest reading in five months and marked a continued period of expansion in manufacturing, the jump is a little too small to seriously cheer the bulls.
Following the January halt in production caused by China’s new year celebrations, the PMI was expected to rise in February. Indeed it did, hitting 51, up from 50.5 in the previous month, thanks to new export orders and increased hiring. (In PMIs, anything above 50 indicates expansion; below 50 indicates contraction.)
But it isn’t all rosy. The increase of just 0.5 points is, by historical standards, pretty low for a new year rebound.
While the manufacturing sector continued its expansion, China’s non-manufacturing PMI contracted for the first time in three months in February, reflecting a decline in consumer and retail activity after the Lunar New Year holiday. It’s worth noting, however, that HSBC’s unofficial reading of China’s services PMI indicated an expansion and painted a different picture than the official data.
With February in the books, focus in the coming week will shift to policy discussions at the NPC and the release of official economic data for February. The China Securities Journal reported on Wednesday that China’s banks likely issued less than RMB 700 billion in new loans for the month, an unofficial figure which would fall short of market expectations despite an anticipated uptick in lending following the recent reduction in banks’ reserve requirement ratio. But the president of one of China’s “Big Four” banks, ICBC’s Yang Kaisheng, sought to dispel the belief that banks had extended fewer new loans so far in 2012:
ICBC lent 165.5 billion yuan in loans in January and February, about 15 billion yuan more than the same period last year, bank president Yang Kaisheng said on the sidelines of the Chinese People’s Political Consultative Conference.
“The idea that we’ve lent less in the first two months of this year is incorrect,” Yang said. “Altogether, the Big Four banks sawloans grow about 20 billion yuan in January and February.”
- A China Daily op-ed published today outlines the economic challenges facing emerging China.
– As part of the working report distributed ahead of Premier Wen Jiabao’s opening remarks at the NPC today, the government will seek to develop its non-public sector by breaking up monopolies and encouraging private investment in sectors such as railways, public utilities, finance, energy, telecommunications, education, and medical care. China’s second-richest man, billionaire and NPC member Zong Qinghou, advocated such a strategy in a weekend interview.
– With property prices and housing development likely to top the agenda during the NPC and CPPCC sessions this week, one Chinese researcher writes in a Xinhua News piece that urban housing policies should not be relaxed.
– A Chinese economist at UBS expects China’s consumer price index (CPI) to rise 3.6% in February, a figure which Xinhua news says would represent a “remarkable pullback” from January’s 4.5% inrease.
– As China continues to promote an eventual internationalization of the RMB, The Global Times reported Sunday that companies based on Guangdong province may soon be able to apply for yuan-denominated loans in Hong Kong.
– Chinese banks have started to give discounted loan rates to first-time home buyers, according to state media, a potential sign of looser policy for the property sector despite nearly two years of tightening measures.
– Hong Kong’s first major IPO of 2012 fell on its first day of trading, after three large cornerstone investors helped to offset a lack of retail demand as investors remain cautious about new issues in the region.
– Copper prices neared their 2012 highs as signs of a soft landing in China helped to bolster global appetite for the commodity.