Sent: 22-11-2013 09:23:03
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China Leaders Make Growth the Priority
Members of China's Communist Party Central Committee have been grappling with the vexed problem of how to retain the facade of communism while letting the market have its head. This is no minor challenge. Having affirmed some broad principles, China's leaders must now come up with detailed approaches to resolve the tension. Whatever they decide to do could take months to become fully evident but an uncompromising focus on growth seems the only way forward.
Last week's communique after the communist party central committee meeting foreshadowed "comprehensive and far reaching reforms" in pursuit of growth. There is no doubting the priority being given by the leadership to prevent any further slippage in the rate of China's economic growth. Premier Li Keqiang used his address to the sixteenth National Congress of Chinese Trade Unions on 21 October to unapologetically justify a focus on GDP as the primary measure of national progress.
I prepared the word cloud at http://www.eimcapital.com.au/PortfolioDirect/daily_views.htm from the 6,600 word English translation of premier Li's speech published by China Daily to visually demonstrate the emphasis on growth in the speech.
The premier's address began with him asking rhetorically "Why do I mention GDP at the very beginning of my address today?". The short answer is that he knows what he has to do to keep peace with the population.
As well as referring to development as "key for solving all the problems we face in China", he quantified the benefit from growth: "in order to add 10 million new jobs each year, we need to maintain an annual GDP growth of 7.2%. In short, to ensure stable growth is to ensure employment". Every percentage point of GDP growth now generates between 1.3 million and 1.5 million jobs, according to the Chinese premier.
Li chided foreign commentators for questioning China's intentions as he made clear that "a growth rate of around 7.5% is taken as the floor. Because this directly concerns employment". Nonetheless, some scepticism about the outcome persists.
The policies introduced in successive waves through the 1980s and 1990s to revitalise an almost moribund state run economy after Deng Xiaoping opened the way to a series of market reforms in 1978, beginning with agriculture, released pressures that had built up since the Japanese invasion (and perhaps from decades before that). In short, there was a lot of catching up to do.
Removing the economic shackles was one source of fresh momentum. There were also 367 million or 30% more people in 2000 than there had been in 1975. The domestic market was bigger and abundant labour was cheap. A third factor was the breakdown of communist power in Europe. This persuaded the Chinese party elders of the need for radical action to sustain their political monopoly. Simultaneously, an 89 million increase in the number of people in Europe and the USA over two decades was creating new openings for manufacturers of consumer goods. Fifthly, high savings rates in the Asian region were a source of investment flows that did not rely on Europe or the USA.
Two decades of outstanding growth ensued but the huge torrent of water that comes after a dam wall is broken eventually becomes a trickle. The communists must now find other dam walls to smash if they are to rekindle the growth profile necessary to support their political and economic goals.
Consistently achieving a 7.5% growth rate will most likely depend on a switch in spending from investment to consumption since the returns from investment spending which had reached 50% of GDP had been declining. In any event, there would eventually be some limit to how many bridges were needed or how many more intercity rail links had to be deployed, even while acknowledging China's infrastructure backlog as it moved to consolidate itself as a global economic leader.
Growth was going to be stunted if 50% of the economy was not going to grow so consumption had to take up a rising share of GDP. Unfortunately, this could only happen if wages also grew rapidly putting extra pressure on production costs and eroding the Chinese competitive advantage as the supplier of every day goods to the rest of the world. The spending switch had to be accompanied by more focus on higher end production and smarter ways of making things if China was to sustain a competitive advantage.
Improved access to home ownership in China in the 1990s is illustrative of the power of reform in driving economic growth. A study published in the May 2012 issue of the Review of Economics and Statistics (Shing-Yi Wang, Credit Constraints, Job Mobility, and Entrepreneurship: Evidence from a Property Reform in China) offered evidence on the impact of changes to private property rights and employer-provided housing on Chinese entrepreneurship.
In 1994, in a large-scale program that affected over 40% of China's urban households, state employees were offered the opportunity to purchase their homes at subsidised prices.
The conversion of state assets to private property not only allowed individuals to capitalise on the value associated with their real estate and hence relieved credit constraints but also improved job mobility.
State owned enterprises will be allowed to admit minority private funding, according to some reports out of China following the central committee meeting. This would be one way to show a more fervent embrace of market economics as well as bring more capital discipline to these commercial behemoths. Free trade areas, set aside from the rest of commercial life starting in Shanghai, are also supposed to help balance markets with politics. Abandonment of the one child policy, another idea being floated, might go some way to averting an impending contraction in population numbers as well as dealing with arguments against oppression of individual rights.
In the end, the party will have little choice about how to proceed. Failure to step boldly due to concern about losing its leading role in the economy could strip three of four percentage points from the growth rate for what is one fifth of the world economy.
Trying to keep the party at the heart of all economic decision making by continuing to corral market forces would most likely lead to so much social and political unrest that the party itself would end up fighting a futile battle for its survival. This much is implicit in the remarks of the premier and the proposals now coming from the party plenum.
Growth will be at the centre of Chinese leaders' speeches for many more years to come. The as yet unresolved question is whether they have enough reform possibilities up their sleeve to get the quantity of growth necessary to hold the line politically.
(John Robertson is a director of E.I.M. Capital Managers, a Melbourne-based funds management group. He has worked as a policy economist, corporate business strategist and investment market professional for over 30 years after starting his career as a federal treasury economist in Canberra. His daily Market Diary - Brief Thoughts on Current Issues is available at http://www.eimcapital.com.au/PortfolioDirect/daily_views.htm).
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