Wednesday, 3 March 2010

Beijing in confident mood, but some hard choices loom

Premier Wen Jiabao should be more upbeat than a year ago when he delivers China’s version of the state of the union address at the opening of the legislature’s annual session on Friday and then faces the media at its close.


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Beijing in confident mood, but some hard choices loom

Cary Huang in Beijing
02 March 2010

Premier Wen Jiabao should be more upbeat than a year ago when he delivers China’s version of the state of the union address at the opening of the legislature’s annual session on Friday and then faces the media at its close.

Wen’s annual work report to the nearly 3,000 National People’s Congress deputies will spell out this year’s broad economic, social and foreign policy goals.

He is expected to declare that China has become the first major economy to recover from the global economic downturn after withstanding its toughest test since the Asian financial crisis that began in 1997. Last year the world’s third largest economy registered the world’s fastest growth, expanding by 8.7 per cent - and outpacing Wen’s 8 per cent target - as most countries slowly struggled along the road to recovery.

Despite concerns about the sustainability of the mainland recovery, louder voices hailed the country for overtaking the United States as the biggest car market, surpassing Germany as the No 1 exporter and potentially replacing Japan as the world’s second largest economy.

With the Western world dazed by banking and property collapses, China still had a purse full of money as the superlatives kept coming last year. For the first time in history, China had the richest banks in the world, the largest phone companies, the biggest internet population, the most nuclear power plants under construction and possibly the biggest middle class.

But this time last year Wen put the Chinese people on notice, telling them to get ready for the rockiest year of the new century, with global financial markets reeling, demand for the country’s products shrinking and factories closing. As factories closed and migrant workers trudged back to the home regions, some predicted that gross domestic product growth would slip to “only” 5 per cent.

In the Year of the Ox, the Communist Party leadership was fully occupied by the fear that widespread economic turmoil resulting from unemployment could trigger disturbances that might even challenge its grip on power. But it turned out to be China’s year after all, with Time magazine choosing Chinese workers for its Person of the Year award, citing the economic growth of the country during the past year and the role it played in stimulating the recovery of the global economy.

Indeed, the year also saw the world’s most populous nation begin to wield its new political and economic influence as an emerging global superpower, when attention was less on China’s rise than it was on what the country would do now that it had arrived.

“The newly confident tone going into the Copenhagen summit on climate change suggests that 2010 will see China continue to flex its fresh political muscle,” said Jin Canrong , associate dean of Renmin University’s School of International Relations.

But analysts also warn that even with China riding the crest of a development wave, challenges still lie ahead this year.

Many economists, inside and outside policy making, have raised doubts over the sustainability of Chinese growth, saying the “recovery” was not genuine because it was largely fuelled by the government’s massive spending. In the past year, Beijing embarked on an unprecedented 4 trillion yuan (HK$4.5 trillion) spending spree to keep the economy growing amid the global downturn.

Some even worried that stimulus money was hitting the wrong targets, as it had not helped the urban private sector, which ultimately creates the most jobs. They expressed concerns that “crazy” bank lending was setting the financial system up for a future non-performing loan crisis of the sort that has crippled Chinese banks in the past. Most agreed that top of policymakers’ concerns now was the return of inflation, asset bubbles and overcapacity.

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“China is now experiencing a V-shaped recovery, but the government’s success at stimulating growth has begun to translate into growing concerns about inflation,” said Jing Ulrich, chairwoman of JPMorgan’s China Equities and Commodities.

In the Global Economic Prospects 2010 report published recently, the World Bank said it saw “signs of bubbles” in the Chinese economy, a problem it said the central government had acknowledged.

The spectre of inflation, exaggerated further by asset bubbles, is especially politically sensitive in China, because rising prices erode the economic gains that the ruling Communist Party has made the basis of its claim to power.

Ulrich said China’s central bank had indicated that rising inflation would complicate economic management this year. The government has indicated a readiness to rein in excessive liquidity.

“It has become clear that policymakers are becoming more concerned about overheating as a result of last year’s aggressive expansion of credit,” Ulrich said.

The overall fear in the market is that the government will have to withdraw from its pro-growth policy, which will inevitably undermine the nascent recovery and slow job creation. The central bank has already begun tightening policy, having lifted the required reserve ratio for commercial banks in January and February.

Tom Orlik, a Beijing-based China analyst with Stone and McCarthy Research Associates, said the problem for Wen’s government would be to “manage the withdrawal of the stimulus without scaring the markets or pulling the rug out from under the recovery”.

“Turning the taps off might be a bigger challenge than turning them on,” Orlik said.

Analysts said Wen would address hard choices facing the economy - making efforts to boost growth to create enough jobs to maintain social stability while ensuring that investment-driven growth would not undermine economic health.

Ma Guoxian , director of the Public Policy Research Centre at Shanghai University of Finances and Economics, said priority should be given to structural reform of the distribution system to solve disparities between urban and rural areas, and between coastal and inland regions.

“The robust growth last year does not solve but worsens the problem, which, if not dealt with properly and in time, will have serious social and political consequences,” Ma said.

He said the disparities had also impeded the government’s effort to restructure the economy and development model, shifting growth from an over-reliance on investment and exports to one driven mainly by private consumption.

Ma said he expected Wen’s work report would focus on addressing issues such as improving ordinary people’s livelihoods and settling problems that the public cared most about. Such “everyday life issues” included employment of college graduates and migrant workers, medical reform to provide affordable services, welfare for disabled people and housing projects for needy families and people hit by natural disasters.

The government should also take more determined action to deal with corruption, a politically explosive issue.

Despite all the challenges ahead, most domestic and international institutions are upbeat about the country’s economic growth prospects, with most forecasting that China will achieve growth of between 9 per cent and 11 per cent this year.

Jin said China would continue to look beyond its borders for ways to expand its influence economically and politically this year.

The World Expo in Shanghai would again bring the world to China, and it was poised to be another spectacular showcase for China’s achievements. “The message will remain one of how China’s rise is characterised by soft power,” Jin said.