High-level meeting offers fresh perspective on China's economic growth prospects

The Central Economic Work Conference held in early December in Beijing has always been regarded as one of the most important conferences on Chinese economic development. As such it always attracts intense attention from observers within China and all over the world, and also from investors, policymakers and corporate managers.

The conference, limited only to very senior Party and government officials, had special importance this year as it followed the Third Plenum of the Communist Party of China Central Committee in November, which called for the continuance of the reform and opening-up policy.

Though the work conference is essentially a platform to discuss crucial economic policies, expectations were rife that the meeting would lay out clear-cut policy directions for sustained economic growth.

Much of these expectations centered on the anticipated growth rate for 2014 and the leeway that policymakers would allow, considering that 8 percent and above has been the desired growth level for more than two decades.

Though there was general consensus that the 8 percent growth levels seemed a bit unrealistic this time, opinion was divided on whether the acceptable growth rate should be 7.5 percent or 7 percent. The seemingly small difference between the two levels, however, can have profound implications on fiscal, monetary, investment and export policies.

Regardless of the actual growth rate, the real progress that was made at the meeting came when policymakers decided that the growth speed would no longer be a fixed economic goal.

That assumes importance, considering that problems like overcapacity in some sectors such as steel and concrete, the excessive liquidity provision and resulting real estate and asset bubbles, the increase in non-performing loans and growing risks in financial sectors, and the gradually disappearing competitive advantages of export industries, can all be traced back to the fixed growth targets. Most of these problems were triggered due to the emphasis on short-term economic growth speed, rather than the quality and sustainability of that growth.

By accepting that they are ready to consider slower economic growth, policymakers have also signaled that China will focus more on quality and sustainability of economic growth in the next decade.

Quality and sustainability, instead of speed, are exactly what China needs to stay ahead. First of all, even at 7 percent, China would still have the fastest growth rate among all major global economies. Given its increasing size, it is not only natural, but also necessary for it to slow down.

Most of the major challenges confronting the Chinese economy like overcapacity and bubble troubles can be related to the speed of economic growth.

Local governments' traditional evaluation criteria of government officials based on economic growth speed has prompted many local governments to offer strong incentives to build capacity in already oversupplied industries primarily to achieve short-term economic growth. Local government financing vehicle liabilities and other local government debts related to infrastructure and real estate development are also directly related to local governments' incentives to speed up economic growth.

Most of these investments and projects lack fundamental cash flows and instead rely on future capital injections, which aggravates existing problems.

Without a clear shift in government objectives and a slowdown in economic growth, there seems to be no solution to these problems. Consequently, the determination to accept and embrace slower but more sustainable economic growth will prove an important achievement of this conference.

However, one has to remain realistic that such an accomplishment does not come without struggle. Many ministries and local governments have expressed reservations about the risks from slower economic growth. Of course, the government's concern with employment, which is closely related to the speed of economic growth, would also surface. Finally, some argue that a slowdown in growth may sway foreign investors' confidence in China or even lead to capital flight and withdrawal of investment interests.

Despite these concerns, one should be encouraged that the Chinese leaders have shown the resolve to take on the more important and difficult challenge of fundamentally shifting the Chinese economic growth model and face the consequence of a slowdown in Chinese economic growth.

The author is a faculty fellow at the International Center for Finance, Yale University; and deputy director of the Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University.

(China Daily European Weekly 01/03/2014 page9)