China reforms in slow lane as Xi Jinping roadmap is foggy

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By Rowan Callick, The Australian, 26 November 2015

The great aircraft carrier that is China is slowly changing direction, as its leaders have been urging for more than a decade.

But it’s happening even slower than expected and the new road map remains vague — in part, ­because few officials now feel sufficiently confident to propose comprehensive reform strategies.

President Xi Jinping has seized the central role in economic reform and many other initiatives, but so resoundingly that little space is left in the room even for professional or technocratic experts. The rhetoric remains strong, but the detail stays thin.

And as the anti-corruption campaign rolls on, almost the entire Chinese elite is seeking to maintain the lowest possible ­profile so they don’t attract the ­notice of the authorities, and thus reluctant to promote bold policies.

Even academics must mind their backs. For instance, a team of Communist Party anti-corruption inspectors moved into the Chinese Academy of Social Sciences this month, with a result that senior researchers are unable to leave the institution to attend conferences, make speeches or conduct research, until the new year.

Michael Komesaroff, the Australian principal of Urandaline Investments and an expert on China’s state-owned enterprises — he once worked for one — says the new broom drive under Xi means that “many traditional and profitable business models are no longer valid”, and that rather than developing and implementing a comprehensive economic strategy, “officials are fighting bushfires”.

This although the government is pressing on with finalising the 13th Five-Year Plan, set to come into effect following the National People’s Congress meeting in March.

The latest World Risk Developments report by the Australian government’s Export Finance and Insurance Corporation, published yesterday, notes that services have now reached half the Chinese economy, with the industrial sector’s contribution slipping to 40 per cent, and highlights the success of the recent Singles Day, set up as a promotion by e-commerce giant Alibaba, which raked in $20 billion, 60 per cent more than last year.

But the “rebalance” towards services and consumption still has a long way to go to catch up with many of China’s neighbourhood peers. It presents the conundrum that the related aim of doubling incomes in this decade, between 2010 and 2020, requires growth to be maintained at 6.5 per cent for the next five years — which may well require further fiscal and monetary stimulus, which in turn risks undermining key reform principles including marketising and liberalising.

And China’s working age population has been shrinking since 2012, further threatening consumption growth. The recent decision of the fifth “plenary” of the central party committee to extend the two-child policy should help alleviate the country’s demographic constraints, but probably only at the margins.

Leading Chinese financial publication Caixin has categorised 113 areas of national reform into the fast lane, the slow lane and the stopping lane.

It says that only 23 areas of reform are on track in the fast lane, while 74 are lumbering along in the slow lane, and 16 policy priorities have ground to a halt. Thus acceptable progress is only being achieved in 20 per cent of the ambitious reform program.

After three years in power, Xi is very popular, and the party is more entrenched than ever as it edges towards its centenary in 2021. But the wriggle room for adjustment becomes smaller and the need for greater technical expertise becomes greater in steering the economy as it becomes more sophisticated.

Leaders now worry that relaxing financial controls may allow people to shift money out of the country just when it is most needed to sustain growth.

They are concerned that allowing banks to set their own rates, a key element in introducing competition into the formal finance sector — which at a retail level is being skirted by consumers substituting the non-state online sites for banks — would risk deepening the bad-loans dilemma.

Much of this is missed in reports by Western financial analysts, who tend to be industry specialists, conveniently viewing globalisation as an exercise in convergence. But China isn’t becoming more “like us”, although it’s investing more overseas. It would be a mistake to assess its success or otherwise by gauging its Westernisation.

During and after the global fin­ancial crisis, China’s leaders were praised by many analysts for saving world growth by their busy printing of bank notes and their big spending.

Now Beijing is being criticised by analysts not only for maintaining a level of stimulus at the apparent expense of more whole-hearted reforms, but also for failing to do enough to boost demand. “Walk! Don’t walk!”

Moody’s ratings agency said yesterday that steel prices would continue to decline next year, due to “slow property investment, modest infrastructure spending and lacklustre manufacturing” in China.

Chinese steelmakers will seek new export markets but for commodity suppliers there seem few alternatives right now but to cop the current price levels as “the new normal”.

Komesaroff believes the extension — beyond a couple of pilot zones — of the relaxation of the ancient hukou system, which restricts where Chinese people can live, will drive a fresh burst of new building and thus steel demand.

But there is little appetite, as we have seen, for such attention-catching “boldness” in the elite.