Sustaining growth will become harder as it can no longer rely on its exports
Reuters 30 September 2009
(BEIJING) China’s Communists are partying this week like it was 1949. They should make the most of it.
Sustaining the rapid growth that has underpinned the party’s legitimacy during the second half of its 60 years in power is about to get a lot harder now that China can no longer rely on turbo-charged exports as the global economy is retooled.
New domestic drivers of growth are easy to identify: stoke consumption by increasing wages relative to profits; expose state-dominated sectors such as banking to competition; nurture a service-based urban economy by easing migration controls that tie millions of unproductive peasants and their families to the land.
Here’s the problem. All those reforms would require the Communist Party to ease its vice-like grip on levers that it uses to control the economy and dispense political favours.
In short, it would have to surrender some of its power - not something that comes naturally to ruling parties anywhere.
‘It can be done. But I’m somewhat doubtful that the Communist Party is willing to give up that kind of authority. Very often, economic loosening up can be seen as giving power away from the centre,’ said Jonathan Fenby, director of China research at Trusted Sources, a London-based emerging market consultancy.
‘Fiscal and monetary policy measures over the past year have increased the power of the state, not diminished it,’ he said.
It would be rash to bet against the party succeeding. Out of choice or necessity, it has got many of the big strategic economic decisions right since it embarked on market reforms at the end of the 1970s.
Accepting the disciplines of World Trade Organization (WTO) membership in 2001, which touched off an unprecedented boom in trade and foreign direct investment, springs to mind.
But sceptics say that the party leadership is so riven by factions that prospects for a fresh wave of radical reforms are poor.
‘Special interest groups have formed around China’s state monopolies, and they have a big influence over China’s rule-making. Their power is still growing, and it is likely to do so for years to come,’ said Sheng Hong, director of Unirule Institute of Economics, a Beijing-based think tank.
Nicholas Consonery, a Washington-based analyst with Eurasia, a political risk consultancy, points to the thick ties between the many firms that have benefited from export-led growth and their backers across government.
‘There’s a tremendous amount of money at stake in continuing the current export-focused strategy,’ he said. ‘It’s going to be tough because of this combination of corporate and political interests for the leadership to pursue the structural adjustments needed to reorient the economy towards the domestic market.’
Liberalising the financial services sector would require an even greater sacrifice of self-interest.
Banks are at the nexus of Communist power. It is through big state-owned lenders that the party channels cheap money to big state-owned firms, securing the commanding heights of the economy.
Minxin Pei with the Carnegie Endowment for International Peace in Washington said that he could not envisage the party permitting significantly more financial competition.
‘This is where the government makes its money and maintains its political patronage system. I do not believe the Communist Party will be foolish enough to let somebody else eat this piece of juicy meat,’ Mr. Pei said.
For Nicholas Lardy, a China scholar at the Petersen Institute of International Economics in Washington, the lack of competition in banking matters less for the efficiency of China’s economy than state control over interest rates.
‘The fact that the State Council and, ultimately, the Party controls the interest rate structure is an important lever of power,’ Mr. Lardy said.
One consequence is that banks have little incentive to lend to small and medium-sized enterprises (SMEs), most of them privately owned, even though they generate more than 75 per cent of urban jobs.
That SMEs are such job machines offers perhaps the greatest hope that Beijing will do what it has long promised and make it easier for private firms to get the loans and licences that they need to compete at the margin with state-owned incumbents.
‘Without steady growth of SMEs, it’s hard to solve the problem of unemployment and hard to ensure social stability,’ Industry Minister Li Yizhong said on Sept 22.
Mr. Li said that a blueprint for small business unveiled that day by China’s cabinet, was aimed at encouraging more private investment - vital to sustain growth as Beijing’s emergency stimulus spending runs down.
‘The significance of the State Council move does not lie in the measures themselves. The most important thing is that it sends a message to the whole of society,’ Mr. Li added.
The Communist Party need look only at Japan to see what happens when inertia prevents a country from adapting to economic change: with politicians and bureaucrats beholden to powerful producer lobbies, Japan has failed to find new wellsprings of growth since its economy ran into the buffers two decades ago.
Economic stagnation is not a political option for the Chinese Communist Party, which needs to create 25 million jobs a year.
That’s why, perversely, the demise of US consumerism could be positive for China if fear of a sharp slowdown galvanises structural change.
‘In China, things change when there’s a huge crisis,’ Mr. Pei at the Carnegie Endowment said.
China is not in crisis. Still, Mr. Consonery, the Eurasia analyst, said that growing bearishness in Beijing about US prospects had raised awareness of the need for reform. The SME document in particular was potentially important.
‘It could be one of the first early indications that pro-reform advocates are winning out,’ he said.
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Tough choices loom for China
Sustaining growth will become harder as it can no longer rely on its exports
Reuters
30 September 2009
(BEIJING) China’s Communists are partying this week like it was 1949. They should make the most of it.
Sustaining the rapid growth that has underpinned the party’s legitimacy during the second half of its 60 years in power is about to get a lot harder now that China can no longer rely on turbo-charged exports as the global economy is retooled.
New domestic drivers of growth are easy to identify: stoke consumption by increasing wages relative to profits; expose state-dominated sectors such as banking to competition; nurture a service-based urban economy by easing migration controls that tie millions of unproductive peasants and their families to the land.
Here’s the problem. All those reforms would require the Communist Party to ease its vice-like grip on levers that it uses to control the economy and dispense political favours.
In short, it would have to surrender some of its power - not something that comes naturally to ruling parties anywhere.
‘It can be done. But I’m somewhat doubtful that the Communist Party is willing to give up that kind of authority. Very often, economic loosening up can be seen as giving power away from the centre,’ said Jonathan Fenby, director of China research at Trusted Sources, a London-based emerging market consultancy.
‘Fiscal and monetary policy measures over the past year have increased the power of the state, not diminished it,’ he said.
It would be rash to bet against the party succeeding. Out of choice or necessity, it has got many of the big strategic economic decisions right since it embarked on market reforms at the end of the 1970s.
Accepting the disciplines of World Trade Organization (WTO) membership in 2001, which touched off an unprecedented boom in trade and foreign direct investment, springs to mind.
But sceptics say that the party leadership is so riven by factions that prospects for a fresh wave of radical reforms are poor.
‘Special interest groups have formed around China’s state monopolies, and they have a big influence over China’s rule-making. Their power is still growing, and it is likely to do so for years to come,’ said Sheng Hong, director of Unirule Institute of Economics, a Beijing-based think tank.
Nicholas Consonery, a Washington-based analyst with Eurasia, a political risk consultancy, points to the thick ties between the many firms that have benefited from export-led growth and their backers across government.
‘There’s a tremendous amount of money at stake in continuing the current export-focused strategy,’ he said. ‘It’s going to be tough because of this combination of corporate and political interests for the leadership to pursue the structural adjustments needed to reorient the economy towards the domestic market.’
Liberalising the financial services sector would require an even greater sacrifice of self-interest.
Banks are at the nexus of Communist power. It is through big state-owned lenders that the party channels cheap money to big state-owned firms, securing the commanding heights of the economy.
Minxin Pei with the Carnegie Endowment for International Peace in Washington said that he could not envisage the party permitting significantly more financial competition.
‘This is where the government makes its money and maintains its political patronage system. I do not believe the Communist Party will be foolish enough to let somebody else eat this piece of juicy meat,’ Mr. Pei said.
For Nicholas Lardy, a China scholar at the Petersen Institute of International Economics in Washington, the lack of competition in banking matters less for the efficiency of China’s economy than state control over interest rates.
‘The fact that the State Council and, ultimately, the Party controls the interest rate structure is an important lever of power,’ Mr. Lardy said.
One consequence is that banks have little incentive to lend to small and medium-sized enterprises (SMEs), most of them privately owned, even though they generate more than 75 per cent of urban jobs.
That SMEs are such job machines offers perhaps the greatest hope that Beijing will do what it has long promised and make it easier for private firms to get the loans and licences that they need to compete at the margin with state-owned incumbents.
‘Without steady growth of SMEs, it’s hard to solve the problem of unemployment and hard to ensure social stability,’ Industry Minister Li Yizhong said on Sept 22.
Mr. Li said that a blueprint for small business unveiled that day by China’s cabinet, was aimed at encouraging more private investment - vital to sustain growth as Beijing’s emergency stimulus spending runs down.
‘The significance of the State Council move does not lie in the measures themselves. The most important thing is that it sends a message to the whole of society,’ Mr. Li added.
The Communist Party need look only at Japan to see what happens when inertia prevents a country from adapting to economic change: with politicians and bureaucrats beholden to powerful producer lobbies, Japan has failed to find new wellsprings of growth since its economy ran into the buffers two decades ago.
Economic stagnation is not a political option for the Chinese Communist Party, which needs to create 25 million jobs a year.
That’s why, perversely, the demise of US consumerism could be positive for China if fear of a sharp slowdown galvanises structural change.
‘In China, things change when there’s a huge crisis,’ Mr. Pei at the Carnegie Endowment said.
China is not in crisis. Still, Mr. Consonery, the Eurasia analyst, said that growing bearishness in Beijing about US prospects had raised awareness of the need for reform. The SME document in particular was potentially important.
‘It could be one of the first early indications that pro-reform advocates are winning out,’ he said.
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