Forging Ahead With Reforms
A vote of confidence from experts in China’s economic performance this year indicated an optimistic outlook at the 12th National People’s Congress annual session, which took place in March. This wave of optimism came despite the Report on the Work of the Government delivered by Premier Li Keqiang announcing a reduction of China’s annual GDP growth target to around 6.5 percent, slightly lower than 6.7 percent, the actual growth rate of 2016.
This bullish sentiment is fueled by the evidence that the actual growth rate is likely to be higher on the basis of a number of economic indicators, such as Consumer Price Index (CPI), Producer Price Index (PPI) and Purchasing Managers’ Index (PMI), which have been improving since the fourth quarter of 2016.
According to statistics by the National Bureau of Statistics, CPI - a major gauge of inflation - grew only 2 percent year on year in 2016, well below the Chinese Government’s 3-percent annual target. The PPI, which measures costs for goods at the factory gate, reversed a 54 consecutive months’ drop and increased by 0.1 percent in September 2016, and has continued to do so ever since. Manufacturing PMI has been standing at above 51 since October 2016, the highest level since August 2014, indicating an expansion of the manufacturing sector.
“These indicators show that China’s economy has bottomed out and the downward trend is reversed,” said Yao Yang, Dean of the National School of Development at Peking University.
Well-thought-out target
Deng Haiqing, Chief Economist at JZ Securities, said a lower target doesn’t equal an economic downturn, nor does it mean a growth rate lower than 6.5 percent.
“Such target aims to create space for deepening the supply-side structural reform and avoid situations where local governments’ hands are so tied by GDP targets that they cannot effectively implement measures of reform,” he said.
Despite the slightly lower economic growth rate, China remains a significant contributor to the world economy. According to National Bureau of Statistics, China’s GDP grew 6.7 percent year on year to 74.4 trillion yuan ($10.83 trillion) in 2016, which contributed 33.2 percent to the global economic growth in the year.
Experts say that, after China’s economy started recovering in 2016, setting the target at around 6.5 percent will secure employment and allow the country to achieve its objective of building a well-off society in an all-round way by 2020.
“A country with a population of 1.3 billion, China is under serious pressure of job creation. An economy without a relatively fast growth rate cannot create enough new jobs,” said He Lifeng, Chairman of the National Development and Reform Commission.
He said experience showed that about 1.7 million new jobs could be created for each 1-percentage-point rise in the country’s GDP growth rate. China will see 7.95 million new university and college graduates and a considerable number of young people enter the job market in 2017. “To meet our preset target of securing 11 million jobs, we need a 6.5 percent economic growth,” he said.
Sticking to 6.5 percent as the bottom line of economic growth in 2017 is the right choice, as it will prevent risks of economic turmoil, according to Xu Gao, Chief Economist at Everbright Securities. “A growth rate lower than 6.5 percent is likely to undermine confidence in the Chinese economy, and will unavoidably lead to huge economic risks,” he said.
Producing fiberglass (shown above) is a way for companies plagued with overcapacity to grow through innovation XINHUA
Deepening supply-side reform
Cutting overcapacity, destocking, deleveraging, reducing corporate costs and shoring up the weak spots in the economy will remain major tasks in the year to come to deepen supply-side structural reform, according to the Report on the Work of the Government.
The country’s supply-side structure already began to improve in 2016, with targets for slashing overcapacity in the coal and steel industries being exceeded by 44.4 and 20.8 percent respectively. The report laid out a plan to further tackle overcapacity in both industries.
Deng believes a priority of supply-side structural reform in 2017 will be the clean-up of so-called zombie companies, which are highly-indebted businesses that continue to operate, usually in sectors suffering from severe overcapacity.
“These companies are economically inefficient and a burden to a market-oriented economy,” said Deng. According to State-Owned Assets Supervision and Administration Commission of the State Council, China has over 2,000 zombie companies with assets value totaling 3 trillion yuan ($434 billion).
Real estate and SOEs
Ensuring stable long-lasting development of the real estate market is also among reform priorities in 2017. Currently, housing prices in major cities like Beijing and Shanghai remain high, whereas the property market in small cities is grappling with excess inventories.
“To address the high price bubble and liquidate excess inventories, we must adjust the urbanization layout. Functions and industries of overpopulated megacities should be relocated to surrounding small cities,” said Yang Weimin, Vice Minister of the Office of the of the Central Leading Group on Finance and Economic Affairs.
Yao echoed Yang’s views and suggested that a good way for local governments to deal with excess real estate inventory would be to introduce measures to incite rural residents to purchase properties in small cities.
“Real estate is facing a problem of high leverage. By introducing stimulus measures, excessive inventories can be liquidated and debts can be settled with real estate developers’ sales revenues,” said Yao.
In regard to deleveraging, the Report on the Work of the Government also noted that corporate debt leverage should be brought down in 2017. Huang Zhilong, Economist with the Suning Institute of Finance, thinks the focus will be on reducing the debt leverage of state-owned enterprises (SOEs).
“The way to do this is to minimize indebtedness and maximize assets,” said Huang.
Yao also suggested combining the efforts in addressing SOEs’ high leverage with mixed ownership reforms of SOEs. “Through debt-for-equity swaps, private capital can bring real management changes to SOEs so that their powerful technologies and human resources can be fully utilized,” he said.
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