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China goes for ’gently does it’

Chinese economic reforms continue, but the authorities are going about it carefully. After all, they don’t want to risk missing their growth targets. Oil-price declines and the US growth recovery are providing some welcome wind in China’s wings.

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The Chinese economy is struggling with headwinds. In 2014, third-quarter growth was the lowest in five and a half years and there is a big chance that the growth target of 7.5% will be missed. This growth deceleration is partly related to the curbs in credit lending, a measure the authorities adopted to prevent the real-estate market from overheating. Measures taken to reduce pollution also had a negative impact in growth.

Welcome support from low oil prices

And yet Robeco’s chief economist Léon Cornelissen is not somber about the growth outlook for this year: “The Chinese authorities will probably go for a growth target of 7% this year, but they will not accept a lower growth number as this would have a serious effect on employment. And 7% is doable.” According to Cornelissen, the lower oil prices will quickly drive inflation lower in China, which in turn creates more room for stimulus through interest rates. That China wants to reduce its major dependence on foreign oil supplies is not an issue at this point: “Low oil prices are very favorable for China. The country has major coal reserves, but in terms of CO2 emissions, that is not handy and at this price oil is irresistible.”

The reforms the authorities are currently implementing are in Cornelissen’s opinion not a major threat to growth. “In the past, there was a tendency to push regional leaders to maximize economic growth. But now the focus is on budgetary discipline, too. However, if this is excessively stringent, it puts a brake on growth, though the effects are not so dramatic in practice. Further they are compensating this with monetary stimulus measures or letting the yuan weaken faster versus the dollar.”

But this method of sliding exchange with the dollar is not a pertinent issue at the moment. However, the central government has pumped capital into the banks and invested further in infrastructure projects. What’s more, the continuing recovery in the US economy is having a positive effect on growth in China.

The condition the authorities place on the reforms is that growth does not come under too much pressure

Weak domestic spending

But Cornelissen is a little less positive for the longer term. “Private-sector debt and debt at lower levels of government are not likely to put any pressure on growth this year. But debt problems are increasing and that is unfavorable for the longer term.”

Another problem is domestic spending: “This is weak because the Chinese are keen savers due to inadequate social provisions”, according to Cornelissen. “It would be better – for the global economy, too – if there was a greater focus on this issue.” The transition the government is pursuing from an export-led economy to a consumption-driven economy could do with changing up a gear or two, says the economist. “It is under way, but they’re opting for a ’gently does it’ approach. The condition the authorities place on the reforms is that growth does not come under too much pressure, as that would threaten social and political stability.”

Léon Cornelissen , February 2015

Article also available in : English EN | français FR

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