China should quickly let market forces play bigger role

January 27, 2015 18:35
Premier Li Keqiang said China will better utilize the contributions of both the government and market forces during its economic restructuring. Photo: Bloomberg

Chinese leaders are stepping up their efforts to unleash the growth momentum the private sector can provide.

Premier Li Keqiang said at the World Economic Forum in Davos, Switzerland, last week that China will have to deepen its economic reforms and better utilize the contributions of both the government and market forces.

Market forces will play a determining role in allocating resources to build up a new growth engine, while the government will play a role in upgrading the traditional economic engine.

Internet conglomerate Tencent Holdings Ltd. (00700.HK) launched China’s first private online bank,, in Shenzhen’s Qianhai economic zone this month, and Li visited its headquarters.

Privately run banks are a key step in the reform of the country's financial markets.

China is going through a transitional phase of its economic restructuring, which might take over 10 years to achieve.

However, we could see positive results within three to five years.

The restructuring will cool down economic growth and tackle some emerging problems.

The government is not, however, printing more money.

Instead, it’s relying on the private sector and market forces to spearhead the reforms and force state-owned enterprises and the Big Four banks to follow in their footsteps.

Private companies and households will benefit if the longtime monopoly held by the state-run oil giants is broken.

Chinese oil firms report production costs that are double those of Middle East producers and above those of US companies.

China will suffer the effects of a slowdown in economic growth this year.

However, the government is determined to focus on long-term, high-quality growth.

As Li said, it should stick to its strategy and implement an active fiscal policy and a prudent monetary policy, without massive monetary easing.

The gross domestic product grew 7.4 percent in 2014, while the consumer price index rose less than 1.5 percent, and the producer price index contracted for the third straight year.

These figures show that domestic demand is cooling.

Lackluster demand will extend into this year, and the continued destocking pressure will make rapid growth in industrial output unsustainable.

Deflationary pressures will increase in the short term. The CPI may drop 1 percentage point in the first quarter and hover at 1.6 percent this year, while the PPI may increase 0.5 percentage point.

Infrastructure investment may continue to maintain a growth rate of over 20 percent, but there are uncertainties in the property sector.

Will any other property firms collapse following Kaisa Group (1638.HK)?

The resulting impact on property prices will be a key issue for local officials. Local government financing vehicles are closely linked to the local property sector.

Consumption is likely to stabilize at present levels because of the slowdown in economic growth.

Investment sentiment in the manufacturing and property sectors will further deteriorate given overcapacity and high inventory levels in second- and third-tier cities.

And infrastructure investment may also fall unless the government eases monetary and fiscal policy.

The export sector is expected to post limited growth.

As a result, China’s GDP growth may slow further to between 7.1 percent and 7.3 percent this year.

The major risks to China’s economy are from property and local government debt.

However, both risks are manageable and won’t pose a huge threat to the economy.

This article appeared in the Hong Kong Economic Journal on Jan. 27.

Translation by Julie Zhu

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adjunct professor in the Department of Finance at HKUST Business School