At 7.7% year-on-year GDP growth in 2013, it’s hard to tell just how much room leaders in Beijing had to wield their rebalancing tools. Growth, which slowed in the last quarter of the year, also to 7.7% from 7.8% in the third quarter, may have given them some elbow room, but not quite enough.
Annual expansion matched that of both 2012 and 1999. During the 12 years in between, China grew by an average of 10.2% per year. So leveling out at well below 8% per year is a significant downshift from what were clearly China’s boom – and likely bubble – years.
Also, it was only thanks to the government’s “targeted stimulus” in the third quarter that nudged GDP above the official 2013 goal of 7.5%. Without the quick stimulus money in July and August, which was reflected in higher-than-expected growth in the second half of the year, China may well have actually hit its target. That could have been a disaster.
Analysts have understood for months now that maintaining a rate of growth above this year’s target was crucial for China’s new administration, led by party boss Xi Jinping and Premier Li Keqiang. Gaining political consensus around strong economic growth in the hopes of pushing through painful reform in the future has been a cornerstone of Li and Xi’s first year in power. That model has even been dubbed “Likonomics” or the “Li Keqiang Put,” after its primary designer.
What’s coming into focus now is the balance between appeasement – that is, powering the economy with cheap credit, maintaining employment and social stability and keeping state businesses afloat – and rebalancing. The concept of rebalancing China has come to mean scaling back government investment, killing inefficient state firms and tightening their access to credit, all the while opening channels of credit to the real economy, namely small and medium enterprises.
This is a delicate balancing act because without strong economic growth, leaders will be wary of implementing reforms, many of which are thought to be impediments to strong headline GDP.
For example, industrial production in December slowed to 9.7% from 10% a year before; FAI eased to 19.6% year-on-year from 19.9% during the first 11 months of the year. The slowing figures likely made the Xi and Li combo less confident about pushing reform in the final month of the year.
“What that points to is the pace for reform was not as quick as people previously expected,” Zhang Fan, senior economist at UOB Kay Hian in Shanghai, said on Monday.
Economists at BBVA Research said in a note that the rate of growth in December was “strong enough to press ahead with reforms.” Glenn Levine, a senior economist at Moody’s Analytics, noted on Monday that, “Beneath the headline there is some economic rebalancing taking place, but not much.”
Leaders were longwinded on talk of reform last year. In several official communiques issued after high-level policy meets toward the end of the year, Xi rose a reformist flag. He called for major market reforms in areas such as state-owned enterprises, resource allocation, and even the social sphere, hitting the one-child policy and the household registration system, or hukou.
For now, much of that reformist speak can be disregarded as far-off ambition. In 2013, the true reformers were at People’s Bank of China. Centralbanking.com in London didn’t give PBOC the “Central Bank of the Year” award for nothing. The PBOC drew a line in the sand between GDP growth and rebalancing and asked who was coming with it.
Not everyone was on board at first. When PBOC first tightened liquidity in the interbank market in late June, banks, analysts and investors yelped in pain. That attempt to slow credit growth in China’s shadow-banking sector was so strong that it prompted the central government to launch its targeted stimulus a month later.
The resulting higher, short-term interbank rates have boosted the cost of financing loans, squeezing banks’ margins. Therefore, they cannot continue lending to the same inefficient borrowers, such as well-connected firms that pay low interest rates. The banks must seek out higher-risk companies looking for longer-term loans. The hope is that the new target is small and medium firms, China’s true powerhouse for efficiency, innovation and employment.
“The strategy seems to be to maintain a decent pace of overall credit growth, but to use higher rates to push banks to seek out more productive private-sector borrowers,” Andrew Batson, senior China economist at GavKal Dragonomics, said in a response to the GDP figures on Monday. “The key is to move credit from less to more productive uses, which will help keep GDP growth relatively stable as credit growth slows.”
The conditions put in place by the central bank made for a rough second half of 2013. But striking a better balance between credit and GDP growth is still the No. 1 question for the new year. “The monetary policy will remain tight so it’s very likely they are thinking about how to balance this tight monetary policy with steady economic growth,” Zhang Fan at UOB said.
More efficient lending that powers robust economic expansion, coupled with slower credit growth, will be the story to follow in 2014. If PBOC can dig in its heels long enough, it could give other leaders the stable footing they need to kickstart bigger financial reforms.