A Shift in Direction

　　INSIDE a sea-wave-shaped building in Dalian,a coastal city in northeast China’s Liaoning Province,political leaders, business elites and economists fromaround the world gathered to engage with an imposinglist of economic issues that have generated intensepublic concern. At every turn the word “reform”emerged as the mantra.

　　It was venue of the World Economic Forum’s AnnualMeeting of the New Champions 2013, or the seventhSummer Davos, which ran from September 11 to 13 atthe Dalian International Conference Center. Under thetheme Meeting the Innovation Imperative, the forumfocused on China’s economy as well as future measuresby the new Chinese leadership.

　　“The new season of the Chinese economic miracle,one of better quality and higher efficiency, is unveiled,”said Chinese Premier Li Keqiang at the opening ceremonyof Summer Davos on September 11.

　　Five years have passed since the eruption oftheglobal financial crisis in September 2008. While the developedworld is beginning to show signs of recovery,emerging economies now face the threat of slowergrowth. China’s GDP growth declined from 7.9 percentin the fourth quarter of 2012 to 7.7 percent in the firstquarter of 2013, and then further slowed to 7.5 percentin the second quarter.

　　“China is moving rapidly away from quantitativegrowth to quality growth. In the past, it heavilydepended on a resource-intensive model,” MartynDavies, CEO of Frontier Advisory, a South Africa-basedresearch, strategy and investment advisory firm, toldBeijing Review at the sidelines of the forum.Davies believes the rest of the world, especiallyexport-dependent countries like Australia, Brazil andSouth Africa, to varying degrees, would be hit byChina’s slowdown.

　　“The current slowdown is largely policyinduced,and doesn’t mean China is now inthe midst of an economic contraction.The 7.5-percent growth target is quitereasonable for the next few years,” saidAdam S. Posen, President of PetersonInstitute for International Economics, atthe forum.

　　As a matter of fact, since takingoffice,Premier Li has laid emphasis on ensuringsteady growth, adjusting the structureof the Chinese economy and advancingreform, rather than blindly pursuing highspeedGDP growth. “As long as GDP growth doesn’tfall short of 7.5 percent and the consumer price indexis no higher than 3.5 percent, priority will be given tocarrying out reforms and restructuring the economy,”said Yang Shubing, head of the Information ResearchDepartment at the Research Office of the State Council,in a briefing in Beijing on September 16.

　　To fend off the shocks of the global financial crisis,China unveiled a 4-trillion-yuan ($653-billion) stimuluspackage in November 2008. “Though appealing figureswere registered, the economic growth at that time wasqualitatively low,” said Davies.

　　“A short-term stimulus policy could be one way todrive up growth. But after weighing the pros and cons,such an option would not help address the underlyingproblems” said Premier Li.

　　China is at a critical stage of economic transformationand upgrading, said Li, and its prospects werepromising. That was echoed by Fan Gang, Directorof National Economic Research Institute underthe China Reform Foundation. “The currentslowdown marks the soft landing of China’seconomy. By going through two or threeyears of structural adjustments, contradictionswill be basically eliminated,” said Fan atthe forum. He added that China was capableof maintaining steady growth in the secondhalf year, but economic expansion at over 9percent was impossible. “A growth rate floatingbetween 7 percent and 8 percent is thenew normal, while a 9-percent growth rateimplies inflation and asset bubbles,” said Fan.

　　So far, moves to steer the Chineseeconomy in a new direction seem to beworking. Strong rebounds were also seen inmajor economic indicators in August.

　　Consumption-led growth

　　For years, China’s economy has been underpinned bymassive investment and foreign trade. Today, such agrowth model is no longer feasible with rising localgovernment debt and a gloomy external environmentfor exports. The 4-trillion-yuan stimulus package,though significant in helping China ride out of theglobal financial crisis, has led to structural contradictionsin the economy, which need an urgent solution.As Premier Li pointed out in his speech, expandingdomestic consumption is now a top priority when itcomes to restructuring China’s economy.

　　Since the ultimate purpose of economic expansionis to improve people’s livelihood, the leading factorin driving consumption should be the people, ratherthan the government. “China’s economic growthhas become too expensive. Due to large amounts ofcapital input into the economy through fixed-assetinvestment by the government, 5 to 6 dollars of debtis created per every dollar of growth. Inefficiency is aserious problem,” said Davies.

　　Adam Smith’s view that a country’s economicgrowth is closely linked to the size of its market meansthat a bigger market allows for a more defined divisionof labor, giving birth to more advanced and innovativetechnology. With rising productivity, more value will begenerated, which in turn will push market expansion,said Zhang Weiying, an economics professor of PekingUniversity, at the forum.

　　“China’s biggest strength consists in its hugepopulation and market,” said Zhang. “Entrepreneursshould be encouraged to explore the new demandsof consumers and create new growth points for theeconomy.”

　　The question now is how to expand domesticconsumption in a more moderate way. “From theperspective of both consumers and entrepreneurs,the sense of safety is a key issue,” said Lin Yu, Co-CEO of NQ Mobile, a global Internet security serviceprovider, at the forum. For customers, only when basicpublic services are provided, such as education andhealth care, can they really release their consumptionpotential; for entrepreneurs, only when a problem likeintellectual property rights infringement is tackledand a competitive but fair environment is establishedcan Chinese entrepreneurs regain the enthusiasm toinnovate and make long-term investments, Lin said.

　　Interest rate reform

　　“The removal of the upper limit on deposit rates is thelast vital step to completely set the banking sectorfree,” said Li Minxian, President of Guangdong DevelopmentBank, at the forum. In July, China removed itsfloor on lending rates, but experts say removing theceiling on deposit rates is more vital for the countryto realize full interest rate liberalization. Removingthe ceiling is widely considered to be the more “risky”move, however.

　　Despite a promise to give full play to the role ofthe market, the Chinese Government has been verycautious in liberalizing interest rates. “Eliminating theceiling on deposit rates too quickly may incur fiercecompetition among banks, with the result being thatdeposit rates would shoot up much faster than lendingrates,” said Hong Qi, President of China MinshengBanking Corp., at the forum. Therefore, the interestmargin would substantially shrink, forcing banks tostep into high-risk fields. If these banks fail in managingrisks, bankruptcy would be inevitable.

　　To make sure the banking sector would face thechallenge smoothly, a deposit insurance system, asseen in developed countries, is needed, said Hong.More specifically, an insurance institution needs tobe set up to provide financial assistance and ensuredepositors can get their money back when banks arecaught in crisis or on the brink of bankruptcy.

　　Although interest rate liberalization is fraught withrisks and dangers, both commercial banks and thegovernment insists that it is an indispensable part ofChina’s financial reform.

　　Less government intervention

　　Premier Li also reiterated the need to transform governmentfunctions in order to create more efficiencyand less bureaucracy.

　　In March, the Ministry of Railways was reshuffledto create the China Railway Corp., which took over itscommercial operation. Before the reform was carriedout, railway operation featured a combination ofgovernment functions and enterprise management.

　　In other words, every link of the railway businesswas placed under control of the Ministry of Railways,which, at the same time, was entitled to deploy railwayresources nationwide.

　　Now, the railway sector has been pushedtowardmarketization, with the China Railway Corp. shoulderingits debts, marking the separation of governmentfunctions from enterprise operations in the sector.Since the beginning of this year, the Chinese Governmenthas lessened its involvement in provincial andmunicipal affairs and put more decision-making powerexclusively in the hands of lower level governments.

　　Excessive government involvement from all levelshad given birth to an array of problems, such asrepeated construction, mounting debts, and overdependence on the real estate market, Li Daokui,Director of the Center for China in the World Economyat Tsinghua University’s School of Economics andManagement, told ChinAfrica at the forum. “Governmentinvolvement should be reduced in order to spureconomic growth,” he said.

　　Li Rongrong, former Chairman of the State-ownedAssets Supervision and Administration Commission ofthe State Council, believes, “Only when the governmentstops interfering in the business sector, canenterprises realize independent management andrestraint.”