How China can prove naysayers wrong

A lethargic economy should not be accepted as a given

One way of ensuring China's continued success is to maintain the momentum of its economic growth, and do that in full view of the world, making the most of the resources at its disposal. Some people abroad who are not friendly to China are aware of this and like to make a din over the slightest downturn in the Chinese economy, hoping that somehow it will slow down.

The belief that China's economy is no longer rapidly expanding is likely to harm the country and make foreign businesses turn away, and the country's trade negotiating position will be severely compromised.

Since last year the speed of growth has dipped, and participation at the annual Canton Fair in Guangdong province during the year was down, as were sales.

The country needs to be alert to all of this. In the absence of any turnaround, the government needs to adopt strong measures this year to reverse the decline.

The first of these would be to issue sizeable amounts of long-term national debt and local governmental debt to be used for infrastructure and public welfare.

There is a lot of scope for all kinds of infrastructure construction in the country, such as that related to water resources and urbanization. Such infrastructure needs to be carried out through government investment rather than on the back of bank loans. China is a country with great potential for national debt, which is rare today: at the end of 2011 outstanding debt stood at 7.2 trillion yuan ($1.15 trillion; 885 billion euros), accounting for only 15.3 percent of GDP. It would be feasible to add another 10 trillion in five years, and the total would still be less than 30 percent of GDP.

There are few institutions from which a country can safely borrow large sums that are the crucial for relatively fast economic growth. So countries should make full use of debt issued by their central government as well as governments at the provincial and municipal levels. Though the limit in China should continue to be in control of the Ministry of Finance, it is realistic to increase this debt to 100 billion yuan a year based on its having been 50 billion yuan for each of the past two years.

A large amount of long-term national debt (for 10-30 years) is crucial for the Chinese financial market if it is to develop a sound interest-yield curve, and to do so comprehensively; the public would be offered low-risk investment with higher return, obviating the need for people to struggle in the stock market.

Another advantage is that China has enough domestic power to buy the debt without having to resort to foreign institutions.

Second, taxes need to be reduced.

One candidate for such a cut is the value-added tax rate for small enterprises, which would alleviate the burdens of those who are feeling the pinch so they can survive and contribute to employment. The revenue lost could be merged into the debt plan just outlined.

Third, service industries must be opened more quickly.

The main problem for services such as finance, education, medical care, entertainment and legal assistance is the poor standard of service, which makes them unattractive to consumers. This is one key reason why the added value of services always has a small share of GDP. Since it is harder to improve services than it is to improve manufacturing, the country should open up more and introduce high-quality service providers to increase competition. China has a large services market, and the best providers in the world will rush in as long as it opens the door a little more widely. If that is done, the attraction of China will be unmatched.

In the financial sector, the country should abolish as many restrictions as possible on the share percentage held by foreign capital, and on setting up branches and businesses. Thirty years have passed since the financial sector was opened, yet capital held by foreign invested banks accounts for less than 2 percent of China's bank assets. The plethora of limits simply deters investment.

Fourth, demographic policies need to be adjusted.

One thing weighing down confidence in the economy is that the population is aging fast, and in time China will be like Japan. There is some logic to this, and policies need to be readjusted urgently. For years the hope has been to enlarge the share of domestic consumption in GDP, to no avail; yet demographic policy will be most effective in encouraging consumption. It takes time for policies to take effect, but making changes now will change expectations dramatically forthwith.

Fifth, the internationalization of the yuan must be accelerated.

Recently the influential Peterson Institute of International Economics in the US published a research report pointing out that in the past two and a half years the relativity of the currency values of the 10 East Asia economies to the yuan surpassed their relativity to the US dollar. This research is historically significant because the East Asia economies used to peg their currencies to the US dollar. This reflects the rise of the yuan's influence, and a closer tie between these economies and China than the US. If China makes use of the opportunity of quantitative easing in the US and rising skepticism with the US dollar and works harder to internationalize the yuan, its enterprises will benefit in international trade and investment. If there is one thing that will grab the world's attention, this is it.

Sixth, the real estate market needs to continue to be tightened. Economic growth cannot be promoted through real estate investment and speculation; doing so hampers the development of other industries and poses big financial risks. A common way of measuring the cost of housing is the ratio of the average apartment price to the annual income of an average family in large cities; if the ratio is below 10, then housing prices are in a reasonable range.

In Chinese large cities this ratio is essentially above 20, which means that the cost of housing is too high. This year the authorities should adopt a policy that covers property-ownership limits, expanding the coverage of property tax and increasing investment in affordable housing. The limit on the number of properties one can hold is now a little too strict, and though such a policy needs to stay in place, it needs to be eased.

With the economy this year, two policy temptations should be resisted.

One is based on the belief that the Chinese economy is entering a period of change, and will be unable to sustain a relatively fast upsurge; so we should seek lower targets. Since there is still a lot to do in reform and opening-up, how can it be claimed relatively fast growth will not continue? Chinese GDP per capita is just $5,500, which in no way can be taken as a sign that faster growth is over.

Another belief is that the economy has recovered and there is no need for new measures on reform and opening-up. This fails to take account of the fact that international competition is becoming fiercer, and China could easily lose its advantage if it takes its eye off the ball. Significant economic and diplomatic measures are likely in the US, and if its economy picks up steam it will be a highly attractive destination for international capital and other resources. That would pose a challenge to China if its economy continues to languish. In such conditions, financial risks such as unregulated trust management would be likely to appear.

Worldwide it is being forecast that China's economy will grow 7 percent this year, but the country should not be hemmed in by such expectations. It must be confident of its ability not only to neutralize those low expectations, but to turn in a performance that exceeds them.

The author is director of Shanghai Financial Services Office. The views do not necessarily reflect those of China Daily.

(China Daily 01/11/2013 page10)