Their boss, President Xi Jinping, was already unhappy he was taking the blame for the economic gloom that had settled over China this summer, and it was their job to come up with ways to fix it.
Officials from the state planning commission at the Sept. 22 meeting in a conference room at the agency’s headquarters called for the kind of big spending on airports, roads and other government projects that Beijing had relied on to rev up the economy in recent years, according to internal minutes of the meeting.
Finance-ministry officials disagreed, favoring a plan to encourage Chinese consumers to buy more electronics, cars, clothes and other goods China churns out.
But most in the room agreed on one thing: It would be hard to proceed with plans to liberalize the tightly controlled economy and still hope to meet Mr. Xi’s 7% GDP-growth target for 2015. Such plans, laid out in better times, weren’t likely to deliver the shot of growth China’s economy needed.
“Reform itself faces huge problems,” said an attendee at the Sept. 22 meeting, which gathered officials of the National Development and Reform Commission—the planning agency—and the finance ministry, according to the minutes, reviewed by The Wall Street Journal. “It’s doubtful that any reform dividends can be translated into economic growth in the foreseeable future.”
A planning-agency press official declined to comment. Finance-ministry press officials didn’t respond to inquiries.
In the weeks following, China has taken new steps to slow plans that had been meant to loosen control over the financial system, adding to similar delaying moves since summer. Some steps have the effect of keeping industries on life support. On Oct. 23, the central bank scrapped its cap on deposit rates. But it backed away from freeing interest rates from its control, as it was previously expected to do, saying it feared that might raise funding costs for businesses and consumers.
Other steps seek to hold money in the domestic economy rather than letting it flow abroad. On Oct. 30, the central bank and other agencies dialed back on plans for Shanghai’s free-trade zone, a testing ground for financial overhauls, that would have let residents more easily buy foreign assets.
Many measures China’s leaders have delayed since summer are ones that economists and some Chinese leaders have long said are needed to put the world’s second-largest economy on a sustainable growth path in coming years. U.S. Treasury Secretary Jacob Lew has urged Beijing not to postpone overhauling its economy even as growth falters.
Some economists in China are calling on Beijing to press ahead on steps such as fostering more competition among banks, although they urge caution in opening markets wider for cross-border
money flows.
“The reason you want opening-up is to introduce market discipline into the system,” says Huang Yiping, a Peking University economics professor and member of the central bank’s monetary-policy committee. “A very slow pace of reform would be the consequence of a cautious stance.”
Spurring China’s new cautious stance are financial woes that have worsened beyond central authorities’ expectations and ability to counter. “The outlook for the economic situation is quite pessimistic,” a finance-ministry official said at the Sept. 22 meeting, “and probably is worse than people think.”
Stock-market regulators couldn’t arrest declines this summer that erased more than $2 trillion of value in less than a month. The yuan’s devaluation shook the confidence of investors, who rushed to move money offshore. Senior officials privately worry that a wave of layoffs may loom as the downturn bites.
Stocks have rallied since the summer, and China’s securities regulator said Friday it intends to soon lift a four-month ban on stock listings.
A reckoning
But Chinese leaders are facing a longer-term reckoning with the realities of economic gravity, as the high growth of past years peters out and the levers they relied on to boost the GDP prove less effective.
Mr. Xi has expressed dissatisfaction with his government’s handling of the economy. In July, when officials scrambled to try stopping the stock selloff, he got an unpleasant surprise: Economist magazine put him on its cover, portraying him with arms raised, trying in vain to hold up the plunging stock index.
“I didn’t want to be on that cover,” Mr. Xi said at a meeting with top Chinese economic and financial officials, according to people with knowledge of the gathering, “but thanks to you, I made the cover.”
The malaise threatens a Communist Party tenet: China must grow at a high rate. Mr. Xi had said annual gross domestic product growth of around 7% was needed to meet the goal, enshrined in planning documents, of doubling China’s 2010 GDP and per capita income by 2020.
This month, Mr. Xi lowered expectations for the coming years, saying China needs a rate of at least 6.5% for the 2020 goal. Many analysts say that new floor is still ambitious and will require Beijing to step up stimulus measures at the expense of making changes that could squeeze near-term growth.
China’s economy is still growing, but at a much slower rate than in years past. The 7% target for 2015, if met, would be the lowest in a quarter century. Some economists predict growth in coming years of around 4%, well below what Chinese leaders say is needed to create enough jobs.
Chinese officials now see the previously envisioned path toward liberalization as fraught with risk, people familiar with the leadership’s thinking say.
Among those risks: relaxed financial control could let money flee China at a time it badly needs that money at home to prop up the economy; letting companies fail will kill jobs at the worst time; giving banks full freedom to set deposit and loan rates may encourage reckless lending amid already rising bad-loan levels.
Yu Yongding, a former adviser to the central bank and now an economist at the Chinese Academy of Social Sciences, a government think tank, worries China’s huge savings will pour abroad if it loosens capital controls before more investment opportunities are created within China.
Zhang Ming, a protégé of Mr. Yu’s at the think tank, estimates that in the worst-case scenario, opening cross-border money movements could produce nearly $5 trillion in net outflows over several years from China.
Facing those risks, leaders are shifting emphasis to “stability,” code for going slow on overhauls. The Sept. 22 meeting agenda, the minutes show, focused on “stabilizing growth.”
For much of the past decade, the Communist Party leadership was widely praised by Western officials and business people for maintaining high growth and powering through the global financial crisis.
But China’s leaders also have said publicly its economic trajectory required a shift to more sustainable growth. China’s policy blueprints, known as five-year plans, have for a decade called for making consumption and services the economic drivers instead of exports and credit-fueled investment in real estate and infrastructure.
“The government first talked about transforming the economic growth model in 1995,” says Wu Jinglian, a prominent economist with the Development Research Center of the State Council, an advisory body that recommends policies to the leadership, “but it still hasn’t been realized to this day.”
The government’s focus on propping up short-term growth amid economic slowdown, he says, has slowed progress in liberalization.
Chief among the casualties is a plan China launched in 1994—delayed several times—to methodically open its financial borders so funds can flow freely in and out, according to interviews with Chinese officials, executives and government advisers with knowledge of government deliberations.
The so-called capital-account liberalization initiative, long championed by central-bank chief Zhou Xiaochuan and other officials, aims to enhance efficiency in a Chinese financial system that has often directed funds into excessive investment in businesses such as steelmaking, property and infrastructure. Central-bank press officials didn’t respond to inquiries.
Among that initiative’s objectives was to loosen controls over cross-border investment to give Chinese individuals more freedom to invest overseas. Before the downturn, the initiative was seen by policy makers and economists as a way to give Chinese savers more investment opportunities and greater returns, which would spur consumption that supported long-term growth.
August pushback
Pushback against moves toward financial-market openness came in August at a meeting of the State Council, the cabinet led by Premier Li Keqiang, as stocks sank. Some senior officials argued against a year-end timetable the government had set, people familiar with the event say. Says one of them:
“Stability now trumps everything else.”
The leadership has decided to push beyond the year-end time frame for capital-account opening to the end of 2020, according to an official announcement this month.
One early outcome of that initiative’s delay was the Oct. 30 Shanghai announcement. The program there was part of a trial the government planned, which aimed to give citizens in select cities more freedom in buying assets overseas. It is still considering launching the trial. But, if enacted by year-end as originally planned, the program would come with conditions like those being considered for Shanghai, such as limits on the amount individuals could take out of the country—stricter conditions than previously envisioned, say people familiar with the decision-making process.
Since August, Chinese authorities have also put off a plan to create better-functioning stock markets, which had been moribund for years before an epic run-up early this year. Part of that delayed plan was to create an initial-public-offering system based on market demand, as opposed to administrative decrees that limit it now. China’s securities regulator on Friday said the government plans to move ahead on revamping the IPO system but didn’t give a time frame.
China put on hold a plan, originally expected to be announced in the fall, to give foreign money managers wider access to its securities markets.
Beijing is also imposing greater controls over its financial borders even as it pledges to give market forces greater sway as part of its discussions with the International Monetary Fund to name the yuan an official reserve currency.
While the central bank has allowed foreign central banks into China’s bond and currency markets, in the past two months it has deployed measures to discourage trades that would drive down the yuan. It took steps, for example, to prevent money from being taken overseas after the mid-August devaluation sparked a yuan selloff. In an October article in the central bank’s China Finance magazine, Deputy Governor Yi Gang of the bank said China is considering a tax to deter currency speculators.
China is moving to open markets in an “orderly” way, Mr. Yi wrote, a switch in tone for a central banker who long talked about “speeding up” market opening.
China is slowing liberalization of interest rates, too. For years, it artificially held down bank deposit rates, channeling cheap funds to state-owned companies to spur growth. In its Oct. 23 move, the People’s Bank of China did take a step toward liberalization, eliminating the ceiling on deposit rates.
But the central bank, delaying a plan to fully liberalize interest rates by March, said it would continue to manage them in years ahead by telling banks what to charge borrowers and pay depositors.
“The slowing economy is making decision makers move more cautiously toward full interest-rate liberalization,” says a senior central-bank official, “as that could push up funding costs and lead to greater risks in the banking system.”
The Sept. 22 meeting illustrated the sharp internal debate over growth. Planning-agency officials, the minutes show, advocated more spending on infrastructure projects to boost growth.
A better solution, said finance-ministry attendees: improving the share of consumption in the economy. Stimulus spending would be made difficult, they said, by high government debt and reduced state revenues from declining land sales.
Some suggested China’s growth goals needed rethinking. The government, they said, should lower its growth target, or even do away with it, to focus on shutting down money-losing factories, writing off debt and making other changes that might cause short-term pain but help the economy long-term.
“If the government acknowledges the economy can only grow at about 6% instead of 7%,” the minutes quote a finance-ministry official as saying, “that actually would be a good thing.”
Source: Wall Street Journal by Lingling Wei
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