Combining reform with growth

The Government Work Report presented by Premier Li Keqiang at the annual session of the National People's Congress on March 5 confirms that the central leadership will start implementing a fairly comprehensive set of reforms this year. The report discusses plans to implement reforms this year to enable the market and private sector to play a larger role in conjunction with a recalibrated role of the government.

The approach to changes in economic policy, however, remains cautious and gradual. First, growth remains the key objective, as the report stresses that "development (that is, growth) remains the key to solving all our country's problems" and that China "must keep economic development as the central task and maintain a proper economic growth rate". Accordingly, the GDP growth target remains unchanged at 7.5 percent.

In the government's terminology, fiscal policy will remain "proactive" and monetary policy "prudent" in 2014, although these labels do not say much about the actual stance. The government's budget aims to keep the official fiscal deficit unchanged at 2.1 percent of GDP. But the total fiscal deficit, including borrowings by local governments from banks and the shadow banking system, is likely to be substantially higher, as it has been in recent years. Of course, it is hard to know how high.

The report does not contain many specifics on the planned monetary policy other than announcing that the M2 growth target has remained at 13 percent. It stresses the need to "foster a stable monetary and financial environment" and "strengthen macro-prudential management to encourage an appropriate increase of monetary credit and non-governmental financing".

What does this mean for the outlook on growth and policy this year? In the fairly benign base scenario of Royal Bank of Scotland, with sufficient "organic growth", the government can make progress with reining in the pace of increase in the credit to GDP ratio while protecting its bottom line on growth. In a less benign scenario, with less organic growth, the government is likely to be less forceful on reining in credit growth given the emphasis on economic growth. In that case, a systemic financial problem or instability remains unlikely any time soon. However, financial risks would rise further and financial market sentiment would remain bearish.

Second, the approach to rebalancing the growth pattern seems to have evolved, and investment remains key for the government. Many experts and the 12th Five-Year Plan (2011-15) call for a rebalancing of the growth pattern away from investment and industry and toward consumption and services. But the government puts the objective somewhat differently nowadays. It calls for increasing domestic demand and boosting consumption. But it also wants to "fully leverage ... the key role of investment" and says it "will take investment as the key to maintaining stable economic growth".

Third, the government plans a pragmatic approach on how quickly it should move in different areas of reform. Even though the government has called for "breaking vested interests", the report calls for a "focus on areas where the public call for reform is strongest" and "links on which there is extensive public consensus". Thus, the reform areas that are likely to see significant progress are the ones where there is broad agreement and no strong resistance from vested interests. Indeed, looking at the reform areas, the plans are relatively concrete in the ones where there is good agreement and no strong resistance from vested interests.

This is especially the case with financial and monetary reform, where the report's language is quite concrete on the direction-toward a deposit insurance scheme, liberalizing interest rates, expanding the Chinese currency's trading band and more renminbi convertibility under the capital account-although there are no indications on timing.

Also, the government plans further progress on administrative reform and delegation of power to lower levels of governments, reducing red tape, and making the formation and operations of businesses easier.

On the other hand, the approach is more gradual and cautious in areas where reform is more difficult, such as in the case of fiscal and rural land reforms, and those related to State-owned enterprises. In the fiscal area, the plans and intentions on changing the fiscal relations between the central and local governments, as well as on tax policy, remain particularly cautious and gradual.

Having said that, the report's language is more concrete than previous top-level documents on the complicated area of improving the quality of urbanization and hukou (house registration) reform. The government has committed itself to "progressively grant urban residency to migrant workers and their families who are both willing and able to stay in cities and towns where they have had jobs or done businesses for a long time" and "steadily extend basic public services to fully cover the permanent population of cities and towns so that the rural people who live in them can contribute to the development of modern urban life and enjoy it together with the urban people".

In this vein, the government has set itself three tasks involving 100 million people-granting urban residency to migrants, rebuilding rundown urban areas and guiding further urbanization in the central and western regions.

All in all, even though the approach to changes in economic policy remains cautious and gradual, the government plans to start a fairly comprehensive set of reforms.

The author is chief China economist for Royal Bank of Scotland.

(China Daily 03/11/2014 page10)