Reform expected to reap results in China

Building Brics: Optimism in China is on the rise, with a newly installed leader and improving growth during the past few months. Many economic problems remain but a host of policies aimed at boosting expansion are bringing hope.

There is considerable optimism in China about the prospects for reform by the newly installed leader Xi Jinping. REUTERS / Aly Song

After a year in which Chinese growth slowed to its lowest level since the global economic crisis began, there is considerable optimism about this year and the prospects for reform by the newly installed leader Xi Jinping.

Annual economic growth dipped to 7.4 per cent in the third quarter of last year, the weakest rate since late 2008 and early 2009, but growth has been picking up steadily since October on the back of a slate of policies aimed at boosting economic expansion.

The upbeat assessment was given a boost with news that growth in the increasingly important services sector accelerated last month to its fastest pace in four months.

China's official purchasing managers' index for the non-manufacturing sector rose to 56.1 last month from 55.6 in November, according to the National Bureau of Statistics.

Expansion of the world's second largest economy is likely to accelerate to around 8.5 per cent this year partly due to the nation's pro-growth policies, according to the official state news agency Xinhua.

The focus is likely to be on the quality of growth, on keeping the urbanisation process going while improving the lot of those on the land.

China's economy faces a whole host of problems - the country is saddled with huge debt, an overinflated state sector, an ever-widening wealth gap, difficult to budge special interests, a city-country divide and sluggish corporate earnings.

China will make sure there is measured growth in bank loans and social financing and will keep the yuan currency stable to cushion the economy against global headwinds, Xinhua reported after the annual Central Economic Work Conference, which was presided over by Mr Xi.

This two-day meeting is a key plank of the centrally planned economy. It takes place behind closed doors and brings together China's top economic leaders, including leading cadres, private and state-owned banks, central bankers and state firms.

"China will continue to implement the proactive fiscal policy and prudent monetary policy in 2013," Xinhua said.

"The proactive fiscal policy will be combined with tax reforms and structural tax cuts and the prudent monetary policy will pay attention to dynamism and enhance operational flexibility," it said.

China is expected to concentrate on stabilising exports while boosting imports to gradually balance the country's international payments and expanding its outbound investment next year.

It's not necessarily all plain sailing. China's economy still faces global uncertainties along with rising trade protectionism, while the risk of rising inflation and asset bubbles globally is increasing.

But markets will have been pleased by Mr Xi's first trip as leader, a visit to the southern Chinese city of Shenzhen, which was read as a sign that he is committed to reform because it has parallels with a similar trip by reformist Deng Xiaoping during his famous "southern tour" to the same area 20 years ago.

"Optimism on Chinese growth soared to a record high, global growth expectations rose to a 22-month high and almost two thirds are looking for steeper yield curves in 2013.

"Cash levels dipped very slightly to a mid-range 4.1 per cent, but hedge fund net exposure jumped to its highest level since August 2006," Bank of America Merrill Lynch said in a research note called "China in a Bull Shop".

Steve Tsang, at the China Policy Research Institute at the University of Nottingham, said the economy would still need to be rebalanced and restructured, and the real push for new initiatives for the economy was unlikely to get under way until the spring, after Li Keqiang formally takes over as the premier.

"If Zhang Gaoli will indeed also take over as the executive vice premier for the economy and thus the second in command for the economy, they are likely to reinvigorate some form of capital/infrastructural investments to ensure the economy will not slow down too much even if the economies of the EU, Japan and the US remain weak," said Mr Tsang.

"The most essential task that needs to be done, rebalance the economy, is likely to be deferred even though rhetoric on this can be expected to be articulated."

A major test for China will be to see how the rest of the global economy performs.

If the global economy rebounds, then China will have an uneventful year and its economy will hum along well, close to the official target.

"But if the euro problem should turn into a real crisis while the US and Japan remain weak, the pressure on the Chinese economy will force the new government to try to be more imaginative.

"It will in any event also need to work out a real plan to deal with the non-performing loans that were generated by the last round of stimulus that are coming to maturity," said Mr Tsang.

The word among Chinese think tanks is that reform is on the cards, especially as the government wrestles with a yawning wealth gap that threatens social stability.

The message from the hugely influential Chinese Academy of Social Sciences (Cass) is to expect a smooth transition to a higher growth model in 2014.

Yi Xianrong, a Cass researcher, told Shanghai Securities News that China was likely to set a lower economic growth target for this year to achieve a smooth change in its growth pattern and minimise future risks amid uncertainties in the global economy.

After the 18th Communist Party congress, which installed Mr Xi, there has been a focus on "enhancing quality and efficiency of economic growth front and centre".

"One way of reaching that goal is to push forward urbanisation, which will replace the property sector and provide major impetus for a "de-property-ised" economy," Mr Yi said.

"Accordingly, China will not see stunning expansion in its GDP but will see a much-improved economic growth model in the next year," he said.

His colleague Chen Jiagui said China's economic growth had moved from rapid growth to a new stage.

"We should persist in developing at a stable speed, with steady growth while speeding up economic restructuring and deepening the reform of economic system and paying more attention to the improvement of people's lives."

And the prospects of no reform are anxiety-inducing. "If reform is not continued, the next challenge becomes harder to face. Leaders need to understand that delaying reform makes reform more difficult," Lai Yining of the Guanghua Business School of Management told the local media.