Reviving a New Engine
China should let its consumers and entrepreneurs play a larger role in driving economic growth
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UPDATED: April 21, 2014 NO. 17 APRIL 24, 2014
Off to a Good Beginning
China doubles down on reform and consumption as future drivers in the wake of declining growth
By Zhou Xiaoyan

On April 16, the State Council also announced a string of financial and tax moves including cutting the reserve requirement ratio for some rural financial institutions, with a view to providing more support for the rural economy and bolstering job creation.

Wang Jun, a senior researcher at the China Center for International Economic Exchanges (CCIEE), said the recently adopted pro-growth measures will definitely lift the Chinese economy.

"These measures aim to stabilize growth. I think the economic momentum will increase from the second quarter and there's no need to worry that the economy will slide out of control," Wang said.

Lu Zhengwei, chief economist with the Industrial Bank, said the GDP data are better than expected.

"Considering the government's supportive measures that have just been announced in April, we expect growth to rebound to around 7.5 percent in the second quarter," Lu said. "Going forward, further monetary policy loosening may not be needed as the central bank has kept money market rates relatively low."

Zhou Hao, China economist with the ANZ Bank, said growth momentum has stabilized in March, despite the lackluster first-quarter figures.

"China's industrial output of enterprises above the designated size—annual principal business revenue of 20 million yuan—expanded by 8.8 percent in March from an average growth of 8.6 percent in the Jan-Feb period. Retail sales grew 12.2 percent in March, up from the last reading of 11.8 percent," said Zhou.

"In addition, port throughput data and our field study also suggest that China's foreign trade may have bottomed out, and will become more resilient than what the current headline numbers suggest," he said.

Ma Yao, a macroeconomy researcher with research institute CIConsulting believed the first-quarter figures don't necessarily represent the trend for the rest of the year and cannot be used to predict the whole-year growth data.

"Many policies had been just formulated in the first quarter. Major reform measures have yet to be fully implemented. The macroeconomy is bound to pick up in the following quarters after those policies take effect."

Reform-driven growth

The Chinese Government intends to prop up the economy through reforms, rather than by the traditional means of eased monetary policy and progressive fiscal policy.

During his keynote speech at the Boao Forum for Asia, Premier Li Keqiang identified reform as one of China's growth engines for driving the Chinese economy.

If massive stimulus is an instant painkiller, reform is like minimally invasive surgery.

In 2013, a total of 416 administrative approval items were cancelled or delegated to lower governments by the Central Government. Other reform measures, such as business registration system, replacing turnover tax with value-added tax and mixed-ownership reform among the bloated state-owned enterprises (SOEs), are underway to inject more vigor to the market.

China's reform efforts have already paid off, as the number of newly registered companies surged by 27.6 percent last year.

The government promised to cancel or delegate over 200 administrative approval items in 2014 and to provide more tax cuts for small and micro-firms.

Tian Guoqiang, Dean of the School of Economics with Shanghai University of Finance and Economics, said SOEs can hardly serve as the backbone of the Chinese economy.

"Whether or not China can realize long-term high-speed development depends on whether the country can deepen reforms," said Tian.

Decisions made at the Third Plenary Session of the 18th Central Committee of the Communist Party of China held last November said the market should play a decisive role in allocating resources. This is a very good sign, said Tian.

China's competitiveness can be strengthened only when private firms can play a leading role and a modern market system is established. The government should stop micro-managing, limit its functions, and mainly focus on maintaining market order, establishing a society ruled by law, solving market malfunctions and providing services, he said.

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