In my opinion, this is another important article to read. It complements the Reuter’s piece: see - http://chindia-alert.org/2013/09/11/changing-china-set-to-shake-world-economy-again/
WSJ: “What’s the outlook for growth and the plans for reform of China’s economy? China Real Time planned an exclusive interview with Premier Li Keqiang to get the lowdown.
Unfortunately there wasn’t a time when both of us were free. So instead we read the transcript of Mr. Li’s question and answer session with executives at a closed door session at the World Economic Forum in Dalian, Tuesday.
Mr. Li’s remarks on everything from the role of government to the importance of financial reforms contained little in the way of new commitments. But coming ahead of a November meeting of senior Communist Party leaders – billed as the decisive moment for shifting China’s economic model – they raise expectations of concrete progress.
Here are the edited highlights of what Mr. Li said, and what we think it means.
“First, I think we need to get the relationship between government, the market and society right, that’s the key to economic reform, let the market do what the market should do, society do what society should do, and the government do what the government should do.”
A theme Mr. Li hit at his first press conference as Premier back at the National People’s Congress in March, and again here, is the need to get the roles of government and the market right. One of the main criticisms of Wen Jiabao – Mr. Li’s predecessor – was that he allowed the state to grow its role at the expense of a dynamic private sector. The hope among many economists is that Mr. Li will push back in the other direction.
“When there’s downward pressure on growth, one choice is to adjust economic policy, increase deficits, relax monetary policy. That might have a short-term benefit, but may not be beneficial for the future.”
Another criticism of Mr. Wen’s approach was that every hiccup in the economy was greeted with a credit- and investment-fueled stimulus. That helped keep growth buoyant and employment high, but also left a legacy of high debt and industrial overcapacity. Mr. Li is signaling he wants to focus on long-term reform rather than short-term stimulus.
“We will continue to liberalize interest rates… we eliminated the floor on lending interest rates. This is a step forward in the process of making interest rates market based, and we will keep moving forward.”
China’s artificially low government-set interest rates channel funds from household savers to business borrowers – contributing to lackluster consumption and overdone investment. Mr. Wen struck an early blow to liberalize interest rates toward the end of his administration by raising the ceiling on deposit rates and lowering the floor on loan rates. Mr. Li has continued in the same direction, with loan rates now set entirely by the market. The next step is further liberalization of deposit rates – good for savers but bad for banks, which would see profit margins fall.
“We will continue to open up the financial markets – to internal and external competition. For example… we are moving ahead with making the yuan convertible on the capital account.”
Mr. Li says he wants to allow a greater role for private firms in the financial system, and a more open capital account. Both would increase the efficiency of capital allocation. But some economists worry that with China’s state banks overextended from years of breakneck lending, rapid reforms could lay weakness bare and precipitate a crisis.
“We want to create a market environment of fair competition… Enterprises of different ownerships should all enjoy fair opportunities and conditions to compete in the market.”
Low productivity in state-dominated sectors of the economy is a key barrier to sustaining growth. Mr. Li stops short of any specific proposals, but the hope is that areas like telecoms, banking and logistics will be increasingly open to competition.
With an audience of foreign executives, Mr. Li also threw in a reference to protecting intellectual property, a key concern for multinationals that fear their technology and know-how will be pilfered by Chinese rivals.
“I can also tell you all, a few decades ago I was a farmer. That experience has helped me a lot as Premier. If the managers of this building have the experience of ‘cleaning the toilet,’ I believe they can better manage this complex.”
China’s domestic media have focused attention on this line, where Mr. Li nods to his experience as a farmer in the 1970s in inland Anhui province.The message is aimed partly at China’s students. Anticipating close to 7 million university graduates nationwide this year, the government has been trying to encourage realistic expectation on employment prospects. High ambitions are good, but starting at the bottom is OK.
via Reading Li Keqiang’s Tea Leaves at the World Economic Forum – China Real Time Report – WSJ.
See also: http://chindia-alert.org/2013/08/01/china-treads-cautiously-to-rebalance-economy/