News analysis

China pursuing growth at expense of reforms

Many of Beijing's economic boosters may only defer tough times for later, say experts

A slew of policies to spur growth and stout pledges from Chinese leaders to keep the world's No. 2 economy on an even keel might have assuaged fears of a "hard landing", but experts say the risks of a sharp slowdown are not over.

Many of Beijing's growth boosters, such as higher fiscal spending through a record deficit, will not solve its structural problems, they add, with the focus on short-term growth possibly only deferring tough times for later.

On Saturday's opening of its annual parliamentary session, Premier Li Keqiang set a minimum growth target of at least 6.5 per cent yearly through 2020 as part of a new five-year plan, a goal many economists say is "ambitious".

This year, the target is 6.5 to 7 per cent after growth slowed to 6.9 per cent last year, its weakest in 25 years, amid China's bid to restructure its economy without causing mass lay-offs that could spark unrest.

Top economic planner Xu Shaoshi dismissed fears of a hard landing on Sunday, saying it "absolutely will not" happen as Beijing had the flexibility and tools to manage the economy.

But experts say a key risk facing China is its pursuit of short-term growth at the expense of badly needed reforms.

Growth and stability are achievable, at least for some time, but such a strategy will leave unaddressed the deep imbalances in the economy, such as elevated system leverage and excess capacity.

Said Dr Wang Xiaolu of the National Economic Research Institute: "Beijing might have no choice but to continue with monetary easing, which led to many of the problems China faces now like high debt levels, to meet the 2020 target. Slower growth, however, would allow more room for structural adjustments."

If stimulus is accelerated but reform continues to lag, Beijing could end the year with growth on target but even bigger structural problems to deal with, Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a note. Mr Li's speech "confirms that the focus is firmly on supporting short-term growth, with the deleveraging can kicked further down the road".

Even achieving the lower end of the growth target this year is likely to require "further substantial monetary stimulus", as evidenced by the 50 basis point cut to the required reserve ratio last month, noted Moody's Asia Pacific chief credit officer Michael Taylor in a report.

This loose monetary policy might see banks being stressed further with loans to failing businesses and may also weaken officials' pledge to shutter inefficient companies and those mired in overcapacity.

Already, concerns about rising debt levels have grown.

Firms' financial liabilities, for instance, now make up 160 per cent of gross domestic product (GDP), up from 98 per cent in 2008, according to Standard & Poor's. It is about 70 per cent for American firms.

Bad loans also climbed to 1.67 per cent of bank portfolios last year, the highest since June 2009. Earlier this month, Moody's downgraded its outlook for China's sovereign debt from "stable" to "negative".

But not all experts are as pessimistic, with some pointing out Beijing's responsibility in the short run to ensure that the economy does not fall too far below potential.

China has also allowed local governments - whose outstanding debt stood at 16 trillion yuan (S$3.4 trillion) at the end of last year - to swop high-interest local debt for cheaper bonds as part of a refinancing plan.

HSBC's China economists Qu Hongbin and John Zhu said in a note that while deficit levels are expected to rise to 3 per cent of GDP - the highest since 1979 - it does not "represent the avoidance of difficult structural reforms".

"Instead, it recognises that bringing growth back to potential in the near term will help to move the economy away from deflation and lowers the risk of a cyclical slowdown causing more permanent damage," they added.

The allocation of 100 billion yuan to support workers laid off through overcapacity reduction is an example of how policy can address both structural and the cyclical challenges, they added.

But China's more active fiscal policy to bolster growth has met some scepticism. Said UBS economist Wang Tao: "With estimated augmented deficit already exceeding 10 per cent of GDP, it is increasingly difficult to get a sizeable fiscal impulse."

A version of this article appeared in the print edition of The Straits Times on March 11, 2016, with the headline 'China pursuing growth at expense of reforms News analysis'. Subscribe