As the weather heats up, the China bears are scurrying into the shade to lick their wounds. Dismal growth forecasts have been abandoned as Beijing floods the economy with an ever-rising tide of cash.
China’s economy is now pretty certain to grow at 7-8% this year, and at a similar rate in 2010 as well. Top-down government may have its problems, but it’s certainly good at turning on the liquidity taps. In the short term, Beijing’s stimulus package looks like a roaring success.
But let’s not get carried away. The stimulus program is a stop-gap, not a solution to China’s economic problems. Wave after wave of bank loans cannot prop up the economy indefinitely.
The concern now is not what happens over the next 18 months, but what happens after that. With export growth likely to remain in the doldrums for several years, Beijing’s challenge is to find something to replace it. To put the task in perspective, over the last 20 years Chinese exports grew by nearly 20% annually in dollar terms. Much of this growth derived from debt-turbocharged consumption in the US, which came to an abrupt end last year. That means China faces a prolonged period during which Chinese exports grow far more slowly than at any point in the last 30 years.
It is not the first time the country has undergone market reforms to generate a new source of productivity growth during an export slump. Ten years ago, in the aftermath of the Asian financial crisis, then-Premier Zhu Rongji responded by making sweeping reforms to the state sector and privatizing most of China’s housing stock.
So what bold, structural reforms should the government be making today? The obvious place to start is is to deregulate domestic service industries, many of which remain state-owned sinks of inefficiency. Dismantling local monopolies in goods distribution and logistics would also create big opportunities for private-sector growth.
But even more important is financial reform to allow more cash to flow from state-owned enterprises to private enterprises and households. Here there are already positive signs, notably the expansion of the domestic bond market.
The National Development and Reform Commission plans to approve state-owned enterprise bonds of nearly US$88 billion in 2009, nearly triple last year’s total, while issuances of medium-term notes are expected to exceed US$145 billion. And, after years of being banned from borrowing, provincial governments are finally issuing bonds (although officially the Ministry of Finance is doing it on their behalf).
Things are beginning to look up, too, for small private firms, which have consistently been starved of credit under a system that massively favors big state-owned companies. The banking regulator plans to set up dedicated small- and medium-sized enterprise lending units in major banks. In addition, last month saw the launch of the long-awaited Growth Enterprise Board (GEB) on the Shenzhen Stock Exchange, which should create another financing channel for small private firms.
Now that their backs against the wall, there are growing signs that policymakers have found their cojones. If they don’t, China could be in a bit of trouble after the stimulus money runs out in 2011.