Media headlines out did each other in broadcasting China’s 6.8%
contraction in GDP in the first quarter this year. It was indeed
breaking news in that it was the first ever contraction since China
started reporting quarterly GDP data in 1992. However, beyond the
headlines, there is surprisingly little that is newsworthy. It is not
telling us anything we didn’t know already. A deep contraction was
widely expected because of the massive quarantine and lockdown
implemented to contain the COVID-19 outbreak, which practically shut
down the economy. For example, Wuhan, the epicenter of the outbreak,
ended its lockdown only on April 18 after 76 days. Not surprisingly
markets largely shrugged off the news. The S&P 500 rose 1.6% on
April 17, after Nasdaq flipped into positive territory for the year the
day before. Wall Street was not alone, Asian and European stocks also
finished the week higher.To get more
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The slew of Beijing’s counter-cyclical policies to help the economy
recover from COVID-19 has also been well and fully anticipated. Export
rebate rates were raised on over 1,000 products to help exporters facing
slumping demands. New infrastructure projects, many are planned and
budgeted but now moved forward, have started in 25 provinces which will
help prop up demand for industrial production and employment. The
People’s Bank of China, the central bank, has been adding liquidity to
the financial system by cutting interest rates and reserve requirement
ratio, as well as directing more lending to small and medium size
businesses through loan guarantees. According to its data, bank loans
grew by 11.5% year-on-year in March, the fastest growth rate since
August 2018. This is an impressive feat. China’s central bank is
succeeding in raising bank credit growth in the midst of a massive
economic contraction, something that is extremely difficult to do. None
of these will bring about a V-shaped rebound, but they will pave the way
for a recovery that will gather strength through the course of the
second half of the year even if the global economy is still in
recession.
The real news in China’s GDP contraction, which had come and gone
hardly being noticed, is a policy document released without fanfare on
March 30 outlining a set of wide-ranging structural reforms to be
implemented in the aftermath of COVID-19. Ostensibly these structural
reforms are needed, above and beyond the cyclical measures described, to
revitalize an economy ravaged by COVID-19. Upon closer scrutiny,
however, it becomes clear that these are some of the deepest structural
reforms that had been proposed and debated for the last two decades, and
were strenuously resisted and successfully blocked or deferred by local
governments. It appears that Beijing is taking advantage of COVID-19
and the unprecedented GDP contraction to ram through tough reforms that
would otherwise be harder to do. What are these reforms?
These are deep and sweeping structural reforms regarding land use,
the labor market, interest and exchange rates and the financial markets.
They are what really matters if the Chinese economy is to become more
market driven and efficient. On land use, current restrictions on how
rural land can be sold and used for commercial purposes will be lifted,
and the system of rural land acquisition and sales will be made market
driven. Behind these innocuous sounding policy-speak is the intention of
slaying of one of communism’s sacred cows, the public ownership of
land. Sweeping indeed.
The removal of the household registration system, the hukou, is the
centerpiece for reforming the labor market. This will be implemented
nation-wide with the exceptions of a few mega-cities like Beijing and
Shanghai. For the tens of millions of migrant workers, they will be able
to become fully-fledged urban residents in towns and cities where they
are gainfully employed. They will be able to live with their families
and have full access to urban health care, education and social welfare
services. Apart from lifting a highly discriminatory barrier that
divides the Chinese population into two unequal tiers, at one stroke
this reform will also increase urban consumption demand massively,
especially in housing, while further enhancing the growth and dynamism
of China’s burgeoning service sector.
The integration of benchmark lending and deposit rates with market
rates will be the central plank of price reform in banking and finance,
which will align them to become more market driven. The RMB exchange
rate will be made more flexible. Civil servant salaries will be made
comparable with the private sector. The institutional infrastructure for
listing, trading and delisting in the stock markets will be streamlined
with stronger regulatory oversight, and the development of the bond
market will be fast-tracked to offer an expanded range of products in
size and varieties. And, finally, the opening up of the financial sector
to full foreign participation will be accelerated.
Successfully implementing anyone of these structural reforms would
be an achievement. Getting all of them done would be a game changer.
This is clearly what Beijing intends to do by seizing the opportunity
created by COVID-19 and the unprecedented GDP contraction. For those who
welcome engagement with China, be prepared for a more dynamic and
innovative Chinese economy. For those who fear the rise of China, get
ready to face a more determined China that marches to its own tune.
Finally, the GDP contraction may well be the catalyst that Beijing
needs to dispense with the GDP growth target altogether. In the past
decades, it has led provincial governments to boost production
regardless of real demand in order to meet such targets, burdening
China’s economic structure with wasteful over-capacity as a result.
Allowing GDP growth to fluctuate with the rhythm of the business cycle
would be an even greater achievement. That would be truly newsworthy.
The Wall