China leaders play safe on reforms as growth sags

BEIJING: For all the strong rhetoric, China’s latest policy actions suggest a shift in focus on the economy to mix relatively pain-free reforms that burnish Beijing’s credentials for change with measures to prop up sagging growth.

While Premier Li Keqiang provides a drip-feed of easy reforms, he will avoid more radical moves for fear of tipping the world’s second-biggest economy over the edge.

Analysts from top government think-tanks say there is no reason to doubt the government’s commitment to rebalancing China’s economy away from an investment- and credit-driven growth model to one that relies more on consumption and innovation.

But the leaders are aware they are walking a fine line and the economy’s weaker-than-expected performance this year has underlined the need to tread carefully. Reform may well secure future growth, but if they push too hard now they could cause an economic shock that forces Beijing to resort to old-school pump-priming, prolonging the very economic model they are trying to dismantle.

“The government has to safeguard its bottom line in growth, while restructuring the economy. It’s very difficult to balance,” said He Qiang, an economist at the Central University of Finance and Economics in Beijing and an adviser to parliament.

“Economic restructuring can not be achieved overnight and it should be a gradual reform, not a revolution.”

Since President Xi Jinping and Li were appointed in March to lead China they have pressed the reform message to wean the country off a diet of breakneck expansion and easy credit that fuelled double-digit growth for three decades and catapulted China to the top table of global economies.

Just last week Xi was quoted by the official Xinhua news agency on the need “to deepen reforms in all aspects” although he also acknowledged the line between “being courageous and walking steadily”.

In a nod to growth concerns, Beijing has unveiled a series of small steps in recent weeks that analysts say are geared to providing quick help to the economy.

Last week, Beijing said it will scrap tax for six million small businesses, speed up railway investment and offer more help to exporters.

That means radical reforms, such as full interest rate liberalisation, are off the table for now although they may be tackled in October, when the Communist Party holds a key meeting that will set its economic agenda for the next decade and which may also include some political reform.

Until then authorities will reach for low-hanging fruit: uncontroversial reforms that move in the right direction and could have some, even if only modest, impact on growth, but which are limited in scope and ambition.

The central bank’s decision earlier this month to remove the floor on bank lending rates is an example. It was welcomed as a largely symbolic prelude to removing caps on deposit rates, a much more difficult task that will take time.

The central bank says a deposit insurance scheme and other preparations are needed before a move on deposits and economists said besides concerns it would squeeze banks’ profits there is also concern about its near-term economic impact.

“They dare not to liberalise deposit rates now as that could push up borrowing costs,” said Liang Youcai, an economist at State Information Centre, a government think-tank. The working assumption is that lending rates would rise to pay for the higher cost of deposits.