By Christian Rhally, BSc Student at Yale University
Dalian, China - On September 8th, 2013, the Financial Times invited a rather special guest to write an op-ed (paywall). Li Keqiang, the Premier of China, described his vision for the nation's future economic development. Li wrote that the country needs to carry out an important round of reforms, a follow-up to those started by Deng Xiaoping more than thirty years ago. Li's set of reforms, often called "Likonomics" by Western observers, comprises various policies designed to sustain economic growth, notably through an opening-up of the private sector. Among the changes that Premier Li envisions for China, the liberalization of savings rates might be the most ambitious of all. China has already liberalized all interest rates expect for savings - but this crucial last step is taking quite some time. In spite of the strong opposition that he is facing from state-owned enterprises (SOEs) and some members of government, Premier Li is determined to change China and its business environment.
Chinese Premier Li Keqiang is confident about China's growth strategy. Source: Flickr / World Economic Forum under Creative Commons
The "Chinese miracle" might be coming to an end. In the past three years, China's economic growth has decreased from 10.4 percent in 2010, to 9.3 percent in 2011 and 7.8 percent in 2012. Even though 7.8 percent remains an impressive number for an economy with more than 800 million working-age citizens (India grew by only 3.2 percent in 2012), it is approaching a dangerous threshold.
"The Chinese economy is continuing to slow, and it could slow even more. There is a potential hard landing for China," explains Jamil Anderlini, the Beijing Bureau Chief of the Financial Times. According to Mr. Anderlini, if growth drops below 7 percent and consumer inflation rises above 3.5 annually, the Chinese government will need to take serious action to reform its growth strategy.
The slowing of China's economy takes place in a context that is not as sustainable as Premier Li would like it to be. The debt in China owed to nonresidents - by the government, corporations, and by private households, - has dramatically increased over the past few years. Specifically, local governments' heavy borrowing and investing habits to fuel growth have led their debt levels to hit 20 trillion yuan ($3.3 trillion) in 2013, almost reaching Germany's 2012 GDP of $3.4 trillion. Furthermore, an increasing number of people in China complain that the state-led economy and state-owned banks are expanding at the expense of private enterprises, reducing opportunities for business and entrepreneurship.
"Many people think that the state economy is grabbing too many resources," confirms Professor Zhu Ning, Deputy Director of the Shanghai Advanced Institute of Finance and Advisor to the People's Bank of China (Central Bank of China). Nevertheless, Premier Li did not address this issue in his speech at the World Economic Forum in Dalian, China, on September 11th, 2013. Mr. Anderlini says the Chinese government has not mentioned a smaller role for SOEs, and it is unlikely that there will be any reduction in their role anytime soon.
The economy is slowing down, but the government's responses will depend on how slow the growth actually gets, says Mr. Anderlini. If economic growth slows down at the same rate it has in the past three years, the government will probably do more of the same: build more infrastructure and more real estate funded by credit from state banks. In spite of the recent diminishing returns from this model, this "borrow and build" strategy has proven itself. Premier Li, however, seems to reject this strategy - at least partially.
"After weighing the pros and cons, we concluded that such an option [a short-term stimulus policy] would not help address the underlying problems," Li declared at the Dalian meeting. Nonetheless, he later said that China's future industrialization and urbanization promises lots of room for regional development. It seems that Premier Li wants to avoid stimulating the economy through infrastructure investments - but that the country's rapid urbanization will leave him with no choice.
Thames Town, a "ghost city" near Shanghai, is an example of failure in China's strategy to grow through real estate investments. Source: Flickr / triplefivechina under Creative Commons
If economic growth continues to slow, the government will have to implement reform, affirms Mr. Anderlini. It will simply have no choice but to carry out important changes in the economy, following the advice of the World Bank as well as several Chinese and Western economists. In this case, the question will not be whether China should reform its growth model, but rather if the government can do it fast enough to avoid a hard landing.
During his speech at the World Economic Forum, Premier Li declared that the government has already pushed for "reforms relating to market-based interest rates" and that it "encouraged more investment of the non-public sector."
Some, like Professor Zhu, are optimistic about these advancements. However, opposition to interest rate liberalization remains fierce. SOEs, which have regained dominance in China since the 2009 stimulus package, oppose liberalization because it could undermine their advantage over private companies. Premier Li knows that (he lost a battle over deposit rate liberalization in July). Mr. Anderlini suggests that with the opposition from SOEs (in which government officials often hold secret stakes), it is unlikely that liberalization or the privatization of some SOEs will happen anytime soon.
This is a crucial time for the future of China's economy. After 30 years of fast development carried by an incredible average growth of more than 10 percent annually (1979-2009), it seems that the country's growth reached its peak in 2010. Mr. Anderlini argues that China has reached a threshold and needs to rethink its growth strategy. With a growing middle class that consumes more and demands better services, the government needs to implement policies that will create a better environment for private (and more efficient) companies to flourish.
In Dalian, Premier Li stated that further growth would be achieved through a stable macro-economic environment, reforms regarding private enterprises, and expansion of consumer demand. There are high hopes about what is going to happen in the next six months, said Professor Zhu; but advancing Premier Li's agenda will be tough. Strong opposition from SOEs makes their privatization very unlikely in the near future. However, Professor Zhu declared that the liberalization of savings rates could take place in the next two to three years. Premier Li will face many challenges in reforming China's economic policies, but it is likely that his determination will soon pay off.
This story was originally published on studentreporter.org on 23rd of September, 2013. You can read the rest of our World Economic Forum Summer Davos coverage here, where we are focusing on global sustainability challenges and the different solutions discussed at the Summer Davos meeting.