China 'must speed reform' though hard landing avoided

China needs to speed the pace of domestic reform and change its economic model to become less reliant on exports and reduce the impact of crises such as the one roiling Europe, said former banking regulator Liu Mingkang.

The world's second-biggest economy will "never suffer" a so-called hard landing as long as gross domestic product continues to expand at least 7 percent over five years and at least 6 percent over 10 years, Liu said yesterday in an interview with Bloomberg Television in Hong Kong, where he was attending a Fung Global Institute conference. Liu was head of China's banking watchdog until October.

Liu's comments reflect growing concern that the Chinese government need to do more to boost domestic demand and counter a deepening economic slowdown as Europe's debt crisis curbs demand for China's exports. Policy makers are wary of repeating a $586 billion-fiscal stimulus program unveiled in 2008, which drove living costs higher and left some regional governments struggling to pay off bank loans.

"China has made great strides in terms of boosting consumer spending, but in the short term, it has to maintain investment spending if it doesn't want the economy to collapse," said Frederic Neumann, the Hong Kong-based co-head of Asian economics at HSBC Holdings Plc. "The near-term challenge for China is to rescue growth and there is an urgent need to roll out investment projects. Any rebalancing will be for the next two to three years."

China's economy may grow in 2012 at its slowest pace in 13 years, a Bloomberg News survey showed last month, as Europe's debt crisis curbs exports, manufacturing shrinks and demand for new homes wanes. GDP expansion, which dropped to 8.1 percent in the first quarter, may further slip to 7.9 percent in the three months ending in June, according to the survey. That would be the sixth quarterly deceleration.

Loan risk

China has no plan to introduce stimulus measures to support growth on the scale unleashed during the depths of the global credit crisis in 2008, Xinhua News Agency said earlier this week, without attributing the information. The restraint may reflect concern that the record lending boom that helped the nation weather a contraction in trade in 2008-2009 raised risks of a bad-loan crisis.

The health of Chinese banks is "so far, so good," said Liu, who oversaw a restructuring of the nation's banks as the first head of the China Banking Regulatory Commission from 2003 until October 2011. The lenders' corporate governance and risk management systems have improved, and they are "highly conservative," he said.

"In general, the banking industry in Asia is more cautious and more resilient," he said.

Liu presided over capital injections and purchases of bad assets during his tenure as head of the banking watchdog, bringing the total value of bailouts over a decade-long overhaul of State-run banks to $650 billion. The nation's four largest lenders went on to raise a total $74 billion in first-time share sales from 2005 to 2010, with Agricultural Bank of China Ltd's $22.1 billion share sale in 2010 becoming the world's largest initial public offering at that time.