2013: The year of reform

On one hand, the downward pleasure from the uncertainties in the global financial recovery was clearly evidenced in Chinese economy as its growth hit a 14-year low of 7.6% in 2013. On the other hand, Beijing is more tolerant towards some slowdown in growth as China embraced itself to endure the inevitable pain of difficult economic reform and a slowing down on economic growth for the national rejuvenation.

2013 might be regarded as the year of starting a new series of reform in economics, financial, social and political spheres. Three decade of miraculous economic growth has left some deep rooted problem to the country to tackle with e.g. amounting local government's debts, industrial overcapacity, worsening environmental crisis, ''shadow banking'' sector, all time 'booming' housing price, potential of middle class trap, increasing gap between rich and poor, and rampant official corruption. China has come to a critical point to take steps to make corrections and planning a new path to move forward to ensure a sustainable, healthy and quality growth. In 2013, China laid out its unprecedented economic reform after nearly three decades of economic expansion building upon the old economic growth model. The economic reform enables the market to play more decisive roles for instance in the pricing of fuels, electricity and other key resources; in determining the interest rate as well as the exchange rate; in land price as well as the housing price. State owned oil companies have much power on deciding e.g. the price of fuels than the market as they are the largest players on the market and enjoys the privilege as state owned enterprise (SOE). The market observers are definitely curious and waiting to see how the government transfers the pricing mechanism from the SOE to the market itself for example on fuels. Further opening up China's capital market and broadening financial liberalization can be a daunting task embedded with both risk and opportunity. One thing certain is that the central government is trying to reduce the financial risks by modifying the growth model and accepting some slowdown in growth. It is better for the government to take actions earlier before it is too late.

China need to find a more stable footing for its economy, for example, the economy once was to some extent depend on demographic dividend has lost its momentum and become less competitive as result of population aging and fertility decline. Interestingly, the timing of the relaxation of one child policy was almost alongside with the introduction of the radical economic reform. China aims to promote a consumption driven economy at the cost of investment and exports. In 2013, we did not see this happening as the data from the National Bureau of Statistics confirmed again that economic growth was still largely driven by investment. The rebalancing between consumption versus investment and export was not evidenced in 2013 as commented by Tim Condon, an economist in Singapore. The new leaderships promised to revamp the economy and give up its obsession in the simplistic credit fuelled growth model. In spite of this, the fixed-asset investment in the whole of 2013 had an impressive increase of 19.6%. The transition from investment oriented growth to consumption driven economy will require more efforts and more synergy between central government and the local government, and require a more detailed roadmap on getting there.

The new wine old bottle parable tells us that an endeavor to combine the two different systems—new economic reform and old political practice, can be absurd as well as destructive. The reform plan is somewhat paradoxical as on one hand China could risk social and economic instability without reform but continue growing, on the other hand reform means that Beijing will have to give up some of its powers to the market. This definitely makes reform unwelcomed to some but embraced by others. What the government can do and should not do should be outlined precisely and legitimated for the purpose of successfully implementing the reform. It will inescapably come head to head with the powerful vested interests within the party. Whether the economic reform is a piece meal reform or a radical one will be somehow reflected in the government's willingness to give up its control in state owned enterprises in the years to come.

An economic growth of 7.2 percent is required to ensure a stable jobs market as warned by Premier Li. In 2013, the target of 7.5% growth rate was achieved. 2014 can be another year of staggering in growth as result of the uncertainties in the global market and as the reform takes effect. However, a baby boom that might boost consumption is one potential added to 2014's China economic outlook. A good balance between economic growth and the pace of the reform is required to maintain social stability and meet the expectation from the reform. 2014 might be a year to tell what the pace the reform is taking, how determined the leaderships are toward reform and how effectively the reform is carried out. China is moving in a significant direction and hopefully it is in a positive direction.

The author is with the Nottingham University Business School China