Government will push forward reforms to unleash potential for economic growth

The central government has made consistent efforts to enforce its well-conceived reform and development plan, but recent gloomy economic data have fuelled suspicions that the government may slow its reform drive and launch a new stimulus package to boost the slowing economy.

China's industrial production and investment growth have fallen tangibly in recent months, and its export growth has slackened. GDP is expected to slow to 7.4 percent in the first quarter, slightly lower than the yearly 7.5 percent target set by the government, and that slowing is likely to continue into the second quarter. This deceleration has once again given rise to the question, will the government intervene with some stimulus measures?

To answer that, we should first ask whether the government will insist on preventing the economy from going below 7.5 percent or whether it will tolerate slower growth. This question boils down to what kind of balance the government wants to strike between short-term growth and long-term reform. To better answer that, we need to better understand the co-existing three periods the world's second-largest economy is now experiencing.

When describing its economic situation earlier this year, President Xi Jinping said China now faces a period of changing gears for economic growth, a period for the effects induced by economic structural adjustments, and a period for digesting the side effects of its previous large-scale stimulus packages.

The changing-gear period means that the growth will slow from the previous high-speed growth to a moderately slower pace. Both its economic downturn and the Lewis turning point its labor market now faces indicate that such a deceleration is unavoidable. The period for the effects induced by economic structural adjustments means that to promote further development, China should not delay its push for such adjustments.

The Central Economic Work Conference, a tone-setting meeting held late last year, vowed to tackle overcapacity problem and realize innovation-driven development to better propel the country's economic structural adjustments. The period for digesting the earlier stimulus policies means that China will now try to eradicate the negative effects produced by the series of stimulus policies adopted following the global financial crisis in 2008 that resulted in a drastic rise in local government debt and overproduction. The coexistence of these three periods dictates that China will surely regard resolving key problems during these periods as a key task to deal with its economic growth challenges.

In this year's Government Work Report, Premier Li Keqiang said China will eliminate the production capacity of 27 million tons of steel, 42 million tons of cement and 35 million standard cases of flat glass this year. Listing such specific targets for a given year indicates the government's greater determination to eliminate backward overcapacity sectors. The elimination of such sectors will inevitably lead to the shutdown of a number of small and medium-sized enterprises, and the decline in the Purchasing Managers' Index and power consumption seem to indicate the start of the campaign; one that is expected to have unfavorable effects on this year's economic growth. To impose strict control on the growth of local debt will also undoubtedly produce some negative influences on the country's short-term economic growth.

Given the importance of a series of measures adopted to push forward reforms and address accumulated problems, all of which will unavoidably be a drag on economic growth, there is a consensus that the government is unlikely to launch a new round of stimulus packages to boost economic growth.

Despite a 7.5 percent GDP growth target set for this year and efforts to realize it, the government may have a higher tolerance toward a moderate economic slowdown. China does face huge pressures from its economic slowdown, but there is no need to introduce stimulus measures. It is estimated that 7.2 percent may be the lowest growth the government will accept, and growth below this rate will probably cause the government to give a helping hand.

A series of side effects stemming from large-scale stimulus packages indicates that the adoption of blind market-rescue policies is not viable. To curb its economic downturn, the country needs to promote further reforms to release the potential for further economic growth.

Reforms in administrative, taxation and financial areas are expected to offer a new forcible driving force for economic growth.

An accelerating push for urbanization, in which millions of rural residents will move to urban areas and many rundown urban homes will be renovated, will bring about a colossal fixed asset investment to drive national economic growth. At the same time, the expanded opening-up mapped out by the central government, including the building of the Silk Road Economic Belt with Central Asian countries and beyond, a Maritime Silk Road with Southeast Asian countries, an economic corridor with some South Asian nations, as well as its efforts to expand the space for international economic and technological cooperation and accelerate building free trade areas, will also create new opportunities for the country's economic growth. In addition, increased efforts in building government-subsidized housing, developing the smart grid, and bringing wind, solar, hydropower and nuclear power projects to fruition are also expected to play a positive role in boosting the national economy.

The author is a professor with the school of economics and management, Beijing University of Science and Technology. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 04/11/2014 page11)