BEIJING — For all the strong rhetoric, China’s latest policy actions suggest a shift in focus on the economy to mix relatively pain-free overhauls that burnish Beijing’s credentials for change with measures to prop up sagging growth.
While Prime Minister Li Keqiang of China provides a drip-feed of easy changes, he will avoid more radical moves for fear of tipping the Chinese economy over the edge.
Analysts from top government research institutions say there is no reason to doubt the government’s commitment to shifting China’s economy away from an investment- and credit-driven growth model to one that relies more on consumption and innovation.
But the leaders are aware they are walking a fine line, and the economy’s weaker-than-expected performance this year has underlined the need to tread carefully. Overhauls might well secure future growth, but if the leaders push too hard now, they could cause an economic shock that forces Beijing to resort to old-school pump-priming, prolonging the very economic model they are trying to dismantle.
“The government has to safeguard its bottom line in growth while restructuring the economy,” said He Qiang, an economist at the Central University of Finance and Economics in Beijing and an adviser to Parliament. “It’s very difficult to balance. Economic restructuring cannot be achieved overnight and it should be a gradual reform, not a revolution.”
Since President Xi Jinping and Mr. Li were appointed to lead China, they have pressed to wean the country off a diet of breakneck expansion and easy credit that fueled double-digit growth for three decades and catapulted China to the top table of global economies.
Just last week, Mr. Xi was quoted by Xinhua, the state-run news agency, on the need “to deepen reforms in all aspects,” though he also acknowledged the line between “being courageous and walking steadily.”
In a nod to growth concerns, Beijing has unveiled a series of small steps in recent weeks that analysts say are geared to providing quick help to the economy. Last week, Beijing said it would scrap taxes for six million small businesses, speed up railway investment and offer more help to exporters.
That means radical overhauls, like full interest-rate liberalization, are off the table for now, although they may be tackled in October when the Communist Party holds a meeting that will set its economic agenda for the next decade.
Until then, the authorities will reach for low-hanging fruit: uncontroversial changes that move in the right direction and could have some, even if only modest, effects on growth but that are limited in ambition.
The central bank’s decision earlier this month to remove the floor on bank lending rates is an example. It was welcomed as a largely symbolic prelude to removing caps on deposit rates, a much more difficult task that will take time.
The central bank said a deposit insurance program and other preparations are needed before a move is made on deposits; economists said that in addition to concerns that it would squeeze banks’ profits there is also concern about its near-term economic effect.
“They dare not liberalize deposit rates now, as that could push up borrowing costs,” said Liang Youcai, an economist at State Information Center, a government research group. The working assumption is that lending rates would rise to pay for the higher cost of deposits.
China’s leaders have said a slowdown in economic growth is needed for the overhauls to take place, since they will be looking at areas like investment in infrastructure and factories, which ares still the main driver of expansion.
That is why the growth target for this year was cut to 7.5 percent from 8.0 percent.
But the 7.5 percent annual growth of the second quarter was the ninth slowdown in the past 10 quarters and showed that the economy is cutting close to the government’s growth target.
Economists familiar with policy makers’ thinking say that splashing out on big infrastructure projects in the way China did during the global financial crisis is out of question.
Article source: http://www.nytimes.com/2013/07/30/business/global/in-fixing-the-economy-china-aims-for-low-hanging-fruit.html?partner=rss&emc=rss
