x Abu Dhabi, UAEMonday 24 July 2017

A rocky road to restart China's growth miracle with no promise of success

No issue was more heavily discussed at the recent "Summer Davos" World Economic Forum gathering in Tianjin in China than what was likely to happen to the growth rate of the world's second-largest economy.

No issue was more heavily discussed at the recent "Summer Davos" World Economic Forum gathering in Tianjin in China than what was likely to happen to the growth rate of the world's second-largest economy.

Although a 4 trillion yuan (Dh2.32tn) stimulus package helped to maintain China's high-speed expansion after the global economic crisis began in 2007, recent signs suggest the economy may be cooling just as Europe faces the prospect of a double-dip recession.

There have been six quarters of slowing growth and the days of double-digit GDP increases seem a distant memory.

So some in Tianjin were asking whether the dragon economy will be able to keep growing until per capita GDP reaches levels similar to those seen in the country's neighbours in east Asia. Or could the recent cooling herald the start of a longer-term stagnation?

One of the most forthright voices on the subject was that of an economist based in mainland China.

Li Daokui, the director of Beijing's Centre for China in the World Economy, said too much attention was focused on the growth rate, which he said the authorities could easily increase should they want to.

The key, he said, was "the fundamentals of growth".

"[The question is] whether China will be able to become another east Asian country or whether China will end up like the Latin American economies with 35 per cent of US per capita income while east Asia is 75 per cent of per capita."

For all China's breathtaking transformation since Deng Xiaoping initiated the country's economic miracle in 1978, per capita incomes remain a fraction of those in developed east Asian and western nations.

Last year, according to China's national statistics bureau, per capita income, adjusted for purchasing-power parity, averaged US$8,407 (Dh30,878), a huge advance from $1,135 in 2002 but far behind South Korea's $30,206.

Analysts have sometimes described what China has gone through so far as being the easy part. The challenge will be ensuring the country does not land itself in what is known as the middle-income trap.

"There are many, many problems to be solved. The coming three to five years will be the most critical for the next 20 years for the type of market economy we're going to be," said Mr Li.

He warned that China must not rest on its laurels from the last round of major reforms of the financial system about a decade ago.

"Ten years ago, China just had a round of fundamental institutional reform - World Trade Organisation, state-owned enterprises reform and reform of public finances," he said.

"In the past 10 years, China benefited from the dividends of institutional reform. In order to continue to grow we need a new round of institutional reform."

He said measures such as promoting the rule of law - China is often said to be run instead on the basis of rule by law - were critical.

There are other countries China can learn from. In particular, Mr Li said the nation could look to the United Kingdom and gradually reform institutions "without undermining the whole model".

A key question, said Arvind Subramanian, an Indian economist and a senior fellow at the Peterson Institute for International Economics, was whether the political will existed to push through reforms and take on vested interests in the state-owned enterprises that resist a fully market-based economy.

While the likes of Wen Jiabao, China's premier and someone seen as being on the liberal reformist wing of the Communist Party, may talk of the need for change, forcing it through is a different matter.

"The financial system needs reform but you have to take on the state-owned banks. This is an example of why you need reform and who the vested interests are," said Mr Subramanian.

The country must also, he said, deal with the imbalances resulting from its investment-driven growth model, which was "throw money at infrastructure".

It is yet to be seen, he said, whether the economy could generate significant improvements in consumption as a balance to the investment-led growth.

"One big question is whether it is possible to reorient the growth model towards consumption," said Mr Subramanian.

Yet, while some took a bearish view of China's economic prospects, at least in the absence of reforms, other seasoned China watchers were more bullish about the economy.

Sir Martin Sorrell, the chief executive of the communications company WPP, said Chinese leaders "understand the need for change", even if others had noted public pronouncements about reform by some officials did not always become reality.

"I have great confidence in the political leadership here. State-directed capitalism works."