Big reform plans for China’s newest trade zone set high expectations
Reuters: “China has formally announced detailed plans for a new free-trade zone (FTZ) in Shanghai, touted as the country’s biggest potential economic reform since Deng Xiaoping used a similar zone in Shenzhen to pry open a closed economy to trade in 1978.
In an announcement on Friday from the State Council, or cabinet, China said it will open up its largely sheltered services sector to foreign competition in the zone and use it as a testbed for bold financial reforms, including a convertible yuan and liberalized interest rates. Economists consider both areas key levers for restructuring the world’s second-largest economy and putting it on a more sustainable growth path.
No specific timeline was given for implementing any of the reforms, though these should be carried out within 2-3 years, it said, adding financial liberalization may depend on adequate risk controls. Chinese state media have cautioned that dramatic financial reforms are unlikely this year.
An executive at a foreign multinational in Shanghai said his firm was waiting for more clarity. “Is this Shenzen 2.0 heralding the beginning of a new era in trade, or a flash in the pan to simply boost economic confidence?””
via Big reform plans for China’s newest trade zone set high expectations | Reuters.
Indian govt approves 10% dearness allowance hike, to benefit 80 lakh government employees, pensioners
Times of India: “The government on Friday approved a proposal to hike dearness allowance to 90% from existing 80%, a move that would benefit about 50 lakh central government employees and 30 lakh pensioners.
“The Union Cabinet approved the proposal to increase dearness allowance to 90% at its meeting. The hike would be effective from July 1, this year,” a source said.
According to the source, the increase in DA to 90% would result in additional annual expenditure of Rs 10,879 crore. There would be additional burden of Rs 6,297 crore on exchequer during 2013-14 on account of this hike in DA.
This is a double digit hike in DA after about three years. It was last in September, 2010, that the government had announced a hike of 10% to be given with effect from July 1, 2010.
DA was hiked to 80% from 72% in April, 2013, effective from January 1, this year.
As per the practice, the government uses CPI-IW data for past 12 months to arrive at a number for the purpose of any DA hike.
The retail inflation for industrial workers between July, 2012 and June 2013 was used to compute the increase in DA.”
India Rupee Gains 3.5%, Pulls Shares Sharply Higher
WSJ: “India‘s rupee rose 3.5% Thursday, erasing most of the currency’s losses in the previous session when it hit a record low, helped by a central bank step to reduce dollar demand in the spot market.
The sharp rupee recovery also pulled local stocks higher, with the Bombay Stock Exchange‘s S&P BSE Sensex index closing 2.3% up at 18401.04 points. On the National Stock Exchange, the Nifty index gained 2.4% to end at 5409.05 points.
The rupee was at 66.55 to the dollar in late Asian trade Thursday, compared with the record low of 68.80 it hit late in the previous session.
The Reserve Bank of India said late Wednesday that it would sell dollars to the country’s three state-run oil refiners through a designated commercial bank, shifting the bulk of the refiners’ demand for dollars away from the open market. Oil refiners are India’s biggest buyers of dollars, which they use to pay for crude-oil imports.”
via India Rupee Gains 3.5%, Pulls Shares Sharply Higher – WSJ.com.
The economy: A bubble in pessimism
The Economist: ““JUST the other day we were afraid of the Chinese,” Paul Krugman recently wrote in the New York Times. “Now we’re afraid for them.” He is among a number of prominent commentators contemplating calamity in the world’s second-biggest economy. Three measures seem to encapsulate their fears. Economic growth has slowed to 7.5%, from its earlier double-digit pace. The investment rate remains unsustainably high, at over 48% of GDP. Meanwhile, the debt ratio—ie, what China’s firms, households and government owe—has risen alarmingly, to 200% of GDP, by some estimates.
Concerns about the first number were assuaged a little this month, when China reported strong figures for trade and industrial production (which rose by 9.7% in the year to July; see chart). Yet beneath the cyclical ups and downs, China has undoubtedly seen its momentum slowing.
It is the combined productive capacity of China’s workers, capital and know-how that sets a maximum speed for the economy, determining how fast it can grow without inflation. It also decides how fast it must grow to avoid spare capacity and a rise in the numbers without work. The latest figures suggest that the sustainable rate of growth is closer to China’s current pace of 7.5% than to the 10% rate the economy was sizzling along at.
For many economists, this structural slowdown is inevitable and welcome. It marks an evolution in China’s growth model, as it narrows the technological gap with leading economies and shifts more of its resources into services. For Mr Krugman, by contrast, the slowdown threatens China’s growth model with extinction.
China, he argues, has run out of “surplus peasants”. Chinese flooding from the countryside into the factories and cities have in the past kept wages low and returns on investment high. The flood has slowed and, in some cases, reversed. So China can no longer grow simply by allocating capital to the new labour arriving from the fields. “Capital widening” must now give way to “capital deepening” (adding more capital to each individual worker). As it does so, investment will suffer “sharply diminishing returns” and “drop drastically”. And since investment is such a big source of demand—accounting for almost half of it—such a drop will be impossible to offset. China will, in effect, hit a “Great Wall”. (The metaphor is so obvious you can see it from space.)”
Will China’s economy crash?
CNN.com: “After many years of euphoria over China’s rapid growth and the country’s apparently inevitable rise to global economic dominance, the China story has taken a serious turn for the worse. China, it now seems, is about to collapse, and along the way it may well bring the world economy down with it.
Fortunately, the new story may be as muddled as the old one.
China’s economic model has relied heavily on investment and debt. It shouldn’t be a surprise that after many years of tremendous growth driven at first by badly needed investments, Chinese spending on infrastructure and manufacturing capacity is slowing down.
During the same period, debt levels surged as borrowed money poured into more highways, airports, steel mills, shipyards, high-speed railways, and apartment and office buildings than the country could productively use.
Michael Pettis
A few economists predicted as far back as 2006 that China would face a serious debt problem. By 2010, it became obvious even to the most excited of China bulls that this was indeed happening.
To protect itself from the risk of a debt crisis, China must bring spending to a halt. Beijing now wants to rebalance the economy away from its excessive reliance on investment and debt, and to increase the role of consumption as a driver of growth.
But this cannot happen except at lower growth rates.
China debt Fareed’s Take: China’s slowing growth
So what happens next — will China collapse? Probably not. A financial collapse is effectively a kind of bank run, and as long as government credibility remains high, banks are guaranteed and capital controls are maintained, it is unlikely that China will experience anything like a bank run.
What is far more likely is that in the coming years, China’s gross domestic product growth rate will continue to decline as the country focuses on stimulating consumption.
Growth rates during the administration of President Xi Jinping are unlikely to exceed 3% to 4% on average if the economic rebalancing is managed well.
Will the slower growth rate be a disaster for China? Certainly, it would be huge departure from the growth rate of roughly 10% a year for nearly three decades. Would much lower growth rates create high unemployment and huge dislocations for the economy? Some are worried about such scenarios. But the Chinese economy has so far shown a lot of resilience despite passing storms such as the global financial crisis.
Beijing has huge challenges ahead. China’s growth has been a boon to large businesses, the state, the powerful and the wealthy elite. What the Chinese government needs to do is recalibrate growth so that average household incomes can rise and consumers have more money to spend.
This will not be easy to pull off, but there are positive signs. Xi’s government seems determined to make the necessary changes, even at the expense of much slower growth.
Even if GDP growth declines but average Chinese household income grows at 5% to 6% a year, it would put China in the right direction.
As for the rest of the world, there’s no reason to panic over China’s economic slowdown. Contrary to popular beliefs, China is not the global engine of growth; it is merely the largest arithmetic.”
China urbanization cost could top $106 billion a year: think-tank
Reuters: “The cost of settling China’s rural workers into city life in the government’s urbanization drive could be about 650 billion yuan ($106 billion) a year, the equivalent of 5.5 percent of fiscal revenue last year, a government think-tank said on Tuesday.
The figure is based on the assumption that 25 million people a year settle in cities, with the government spending the money on making sure they enjoy the same benefits in healthcare, housing and schools that city residents have, the Chinese Academy of Social Sciences(CASS) said.
“I think the biggest obstacle for turning rural migrant workers into urban citizens is the cost issue,” Wei Houkai, a researcher at CASS, told a news conference, adding that to achieve equality of treatment could take until 2025.
Millions of migrant workers from the countryside and smaller towns work in China’s big cities, often in low-paid manual work, but lack access to education, health and other services tied to the country’s strict household registration – or hukou – system.
China sees the urbanization drive as pushing domestic consumption, which it wants to make the main engine of growth for the economy, replacing exports and manufacturing and investment.
Rural migrant laborers only earned an average 2,049 yuan a month in 2011, or 59 percent of average urban workers’ salary, CASS added.
But they need to pay about 18,000 yuan annually per capita to be able to live in cities and another 100,000 yuan on average for housing, it said.”
via China urbanization cost could top $106 billion a year: think-tank | Reuters.
Related articles
- China Moves on Reforming Hukou? (chindia-alert.org)
- The big roadblock to China’s ‘reset’ (blogs.seattletimes.com)
- Li Keqiang makes urbanization his watchword for growth (wantchinatimes.com)
- https://chindia-alert.org/2013/06/19/7205/
- https://chindia-alert.org/2013/05/31/urbanisation-some-are-more-equal-than-others/
- https://chindia-alert.org/2013/05/23/china-urbanization-plan-hits-roadblock-over-spending-fears-sources/
- https://chindia-alert.org/2013/05/09/chinas-vision-for-a-new-urbanization/
- https://chindia-alert.org/2013/03/07/china-faces-social-financial-risks-in-urbanization-push/
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