China Plans Reforms Amid Economic “Zugzwang”

John Garnaut reports that China is planning “sweeping reforms” aimed at turning around its sputtering economy, according to sources close to the leadership. From The Age:

Liu He, who leads the party’s Central Leading Group on Financial and Economic Affairs, has been given the task of preparing a seven-point blueprint for the Third Plenum of the 18th Communist Party Congress, which is due in about October, according to a source with close ties to several members of the .

If executed as intended, the new reform program would go some way to answering doubts about whether China can continue underwriting the Australian economy, including huge gas and other resource investment plans over the next decade.

Advertisement

Some hedge fund managers say China’s has reached a “zugzwang” moment, referring to the predicament when a chess player must make a move but prefers to pass.

“In China policy is made when the pain of inaction is higher than the pain of action, and we’ve reached that point,” said David Hoffman, managing director of the Conference Board China Centre for Economics and Business.

[Source]

China reported disappointing first quarter GDP growth of 7.7 percent last month, as slumping factory output and soft consumption pulled the economy back from the 7.9% growth figure posted in the final quarter of 2012. But while TIME’s Michael Schuman wrote that “China’s growth model is broken and can’t be so easily fixed,”  investor Mark Mobius told the Vancouver Sun last week that concerns over China’s economic slowdown are overblown:

Q. The most recent news we’ve seen from China has focused on lower inflation and a slowdown in their economy. How much does what goes on in China weigh on the overall emerging markets sector?

A. It has an impact in Asia, of course, because you’ve seen more and more trade and investment between China and the rest of Asia. (But) China is just one part of the whole equation. Because you’ve got a huge Indian economy, you’ve got a very big Brazilian economy, a big Russian economy, the so-called BRICS. Then you’ve got Indonesia, you’ve got Thailand, many other countries that are doing quite well, and are having an impact on what’s happening around the world.

Q. What are we missing (in Canada) by focusing so much on China and the appearance of their slowdown?

A. First of all, the slowdown is kind of a misnomer because if somebody goes from 12-per-cent growth to eight-per-cent growth and they are the second largest economy in the world, that’s not a big, big problem, because they’re growing at a rapid rate. At eight per cent, in a huge economy, the actual dollar amount of increment is greater than it was five years ago.

[Source]

BBC’s chief business correspondent Linda Yueh wrote this weekend that while the services sector has grown more rapidly than other parts of the Chinese economy this year, concerns still linger:

One worry expressed to me about rebalancing towards services and focusing on consumers came from one of China’s best-known economists and the former World Bank chief economist, Justin Yifu Lin of Peking University.

He stresses that consumption should not be pursued for its own sake. The bursting of the credit bubble in America makes that point vividly. Instead, he says, consumption supported by income growth, not borrowing, is key.

He also points out that it’s not exports which are the important factor for future growth, but more government spending and investment for productive uses.

It’s all about finding the right balance. China’s economy is now fairly equally driven by services and industry, while maintaining its position as the world’s largest exporter of goods. Manufacturing is growing and not declining. China is not giving up on exports, it’s simply becoming more balanced.

[Source]