Official: China Recovering from 'Soft Landing'

By Edith M. Lederer 24 January 2013

DAVOS, Switzerland — China’s economy is now recovering from a “soft landing,” but the big challenge in 2013 will be to prevent overheating while still promoting growth, the head of China’s National Economic Research Institute said Wednesday.

Fan Gang told a session on China’s growth prospects at the World Economic Forum in this Swiss Alpine resort that the world’s second-largest economy should grow faster in 2013 than it did last year.

China posted growth of 7.8 percent last year, its weakest performance since the 1990s, but its economy started reviving at the end of the year when growth rose to 7.9 percent, up from the two previous quarters.

“Now I can say the ‘soft landing’ has landed last year, and now it’s under way to recovery,” said Fan, whose institute is part of the Chinese government.

The recovery would coincide with China’s new leadership. Vice President Xi Jinping was chosen in November to succeed President Hu Jintao as party leader—and he will take over the presidency in the spring.

Fan said growth could be supported by local governors’ plans for infrastructure spending and new housing construction spurred by migration from rural areas to cities.

The challenge will be, he said, to see how the central government and the banking system can work together to maintain growth while not allowing the added government spending to promote further heavy borrowing and overheating of investments.

If that happens, Fan said, “I do believe that in 2013 China can grow around 8 to 8.5 percent, and that will lay down a good foundation for the next couple of years.”

Fan said 2013 could also be the year to start the new round of financial, economic, regulatory and social reforms that the Chinese are all expecting.

“The new leadership now talking quite much about reform and reform and reform, and the restructuring, restructuring and restructuring,” he said.

The leaders are calling for recommendations, Fan said.

He said “all kinds of people—not only the reformers but also people that want to go back to the planned economy, people that want to go back to the government social welfare”—are submitting ideas.

But Fan said “we expect the new leadership will mainly keep the direction of reform, in a market-oriented direction.”

Hopefully, he said, this will lead to a new round of reform that keeps growth going in the next five to 10 years.

Fan said new policies and reforms might be announced at a meeting of the People’s Congress in the fall.

He said key reforms needed are in the central government’s relationship with local governments and the markets, the monopoly of state companies and how to promote fair competition, and on social security issues including income distribution and redistribution, and taxation.

Wang Boming, editor-in-chief of the Caijing financial magazine, said the economy did bounce back in the fourth quarter last year “but people are asking, is that sustainable?”

He said what was really surprising in last year’s growth of 7.8 percent was that for the first time, more than half the growth came from consumption, not exports and investment which have driven China’s economy for the past 10 to 20 years.

Wang cited two key reasons for the upsurge in consumer spending—a 100 percent increase in online shopping last year and an increase in the income of people in rural areas, partly due to high grain prices. He said there was also a little bit of new financial reform and regulation.

At another session looking ahead to China in 2020, Li Jingtian, senior vice president at the Central Party School of the Communist Party of China, stressed the government’s commitment to reform. He also said he was “very confident” of maintaining economic growth, though there will be difficulties because of the international economic environment and determining how to drive internal consumption.

Ma Weihua, president and CEO of China Merchants Bank, said consumption holds the greatest potential because it is still low in China—35 percent compared to 70 percent in the United States. But he said if the government wants to increase spending it needs to address social security issues and income disparities.

Xu Xiaonian, professor of economics and finance at China Europe International Business School, said there is too much financial regulation and a clear bias toward state-owned companies.

The key question is whether the government has “political will to reform” and not just talk about it, he said.

“We have to give freedom to the press and media,” Xu said, adding that that is the only way to know whether the party is serious about reforms.

“Otherwise, it’s just lip service,” he said.