Date
17 October 2017
Last year's launch of the Shanghai Free Trade Zone was far from impressive
Last year's launch of the Shanghai Free Trade Zone was far from impressive

Ten things to watch in Year of the Horse — Part one

The past year was a significant one for China, especially on the economic front. It was the start of a round of economic reforms expected to define the development path of the world’s second largest economy.

Before an all-round blueprint was announced in November, authorities had pressed the reform button with a number of measures such as scrapping the lending rate ceiling and setting up the Shanghai Free Trade Zone.

If 2013 was about laying a roadmap and generating ideas, this year will be about implementing them.

Coming off the reel in the Year of the Horse, we list five things which may offer an idea about how the Chinese economy and the much anticipated reform might proceed.

Growth target

The central government set its gross domestic product (GDP) growth target at 7.5 percent for 2012 and 2013 from 8 percent previously.

The move signaled that top policymakers were convinced the days of high-speed growth are over and that the economic focus should switch to restructuring. The target is important because it gives an idea about their approach to reform.

This approach can be gleaned from last year’s experience. The leadership took a rather active approach in the first half when it seldom talked about growth. But it pulled back a bit in the second half after GDP growth slowed to 7.5 percent in the second quarter. Since then, top leaders have been talking about maintaining a certain growth rate, adopting a cautious approach to monetary policy and reform.

The 2014 target will be announced and approved by the top legislature at its annual meeting known as the “two sessions”, usually scheduled for March.

Premier Li Keqiang emphasized his “reasonable zone” theory as he solicited views from economists and entrepreneurs on his government work report to be delivered at those sessions.

That means it is highly likely that the 2014 GDP growth target will be 7.5 percent, showing that the central authorities will not allow radical reform to hurt economic growth.

But if the target is 7 percent, it would show that a number of measures -– such as scrapping the deposit rate floor and opening the capital account –- would be brought forward at least one year.

Unemployment rate

The jobless rate is used by the government as a guide in designing economic policy. Until last year, China had revealed only the registered unemployment rate. In August, the National Development and Reform Commission, for the first time, quietly mentioned in a report on China’s first-half performance that the surveyed unemployment rate, which better reflects the job market, was 5 percent. However, this was not mentioned publicly again for the rest of the year.

According to media reports, the government has compiled the surveyed rate since 1996, but the figure was largely used internally for policymaking purposes. The reluctance to making it public is partly due to government concern that the surveyed rate, which is often higher than the registered unemployment rate (a constant 4 percent) could trigger public unrest.

It is this fear of upsetting the job market that leads to situations in which policymakers resort to stimulus measures whenever economic growth slows, hampering reform and the process of market selection.

In this sense, if the government regularly releases the surveyed unemployment rate this year, it would show its confidence in maintaining stability in the job market. Reform could be quickened. If not, more of the same employment concerns would prompt the government to rely on investment for short-term growth.

Shanghai FTZ

To be frank, last year’s debut of the Shanghai Free Trade Zone (FTZ) –- a test ground for the next stage of reform –- was not so impressive. This is mostly because it was established in a hurry. There had been no broad consensus among government departments before it was launched. Also, the pilot program needs more time to deliver tangible results.

But one thing is for sure. The so-called negative list, a roll-call of industries and foreign investors banned or restricted from pre-entry national treatment disappointed many. It is a rehash of existing foreign investment guidelines.

If the 2014 version of the list is not changed, it would show that resistance to reforming the foreign investment system remains formidable.

What’s more, a much awaited financial deregulation has not happened in the FTZ. It remains to be seen whether it would be a pioneer in this regard.

But if more FTZs are established in other cities before Shanghai can make a breakthrough, it could be said that the idea of FTZs as a means to advance the reform process is no more than a headline-grabbing concept.

Free trade

Last year’s spotlight fell on China’s bilateral investment talks with the United States and the European Union. Although the negotiations will take years to complete, a breakthrough came after China said it will adopt a negative list with the US. This year will see both negotiations enter a concrete phase.

In 2013, China signed free trade agreements (FTAs) with Iceland and Switzerland. This year will see a deal with the Gulf Cooperation Council. Talks with South Korea on an FTA are progressing well.

In addition, China has announced it is open to the US-led Trans-Pacific Partnership.

All these efforts show top policymakers are keen to leverage free trade and investment to propel reform. It would not be a surprise to see more deals in 2014.

Internet finance

The government is banking on the e-commerce industry to overcome resistance to reform. Premier Li’s frequent meetings with executives of big internet players such as Alibaba, Baidu, Tencent and Xiaomi shows his support for innovation in industries dominated by state monopolies.

For example, in the past, things like internet finance would be dead in the water in the face of resistance from state banking giants. But the top leadership’s endorsement of internet finance, a marriage of the internet and fund companies, has dealt a heavy blow to traditional banks.

Competition in the banking sector is rising, resulting in a credit crunch and forcing banks to increase deposit rates to attract customers. Clearly, banks have to innovate and improve their services to survive the challenge of China’s internet giants. This will also pave the way for the breakup of state monopolies.

Following this logic, it is reasonable to expect top policymakers to leverage the power of the internet and private companies to curb the influence of state enterprises on competitive sectors.

This year, we expect internet players to win banking licenses and flex their muscle in other industries such as telecommunications.

– Contact the writer at [email protected]

RA

 

The writer is an economic commentator. He writes mostly on business issues in Greater China.

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