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Reform implementation poses major challenges

Updated: 2014-07-28 20:37
By Andrew Moody ()

The economist is also skeptical that any meaningful rebalancing could occur if the economy suffered an investment bust.

But a Peking University finance professor, Michael Pettis, argues in his latest book, Avoiding the Fall, that the economy would naturally rebalance if in a worst case scenario it crashed.

Reform implementation poses major challenges
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Reform implementation poses major challenges

Premier Li vows to lower hurdles for businesses 

"I don't think you can expect the whole process of rebalancing to depend on collapse of investment. This would not lead to a long-term rebalancing.

"What we need for rebalancing is a lower savings rate and lower investment rate, and higher household consumption and these need to be permanent features," Wang says.

He says any hope of rebalancing in China was delayed by the financial crisis, which led to the Chinese government responding with a 4-trillion yuan ($660 billion) stimulus, one of the largest in history, which worsened the existing imbalances. "Many government investment programs resulted in bubbles and debt problems. We need to learn lessons from the financial crisis because there was certainly over-investment in the economy."

For Wang, it also exposed a local government funding problem (many cities and towns in China remain seriously in debt), which needs to be resolved as part of the rebalancing process.

"Local governments rely too much on land sales for funding. It is not sustainable because land is limited and you cannot sell it forever. Land sales are not well monitored or transparent. Local governments need to be able to raise money in local taxes and be less reliant on central government," he says.

The government unveiled its 10-year plan for the country at the Third Plenum of the Party last October, and at the annual Central Economic Work Conference, that followed two months later, the detailed reforms for the current year were outlined.

As part of rebalancing, the government set out plans to reform the social security and health systems, which would give people more confidence to spend or consume and not save for future rainy days.

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