China: Slow, safe and steady

Six months into China’s grand economic makeover, Beijing is playing it safe, choosing gradual progress on many fronts over game-changing, riskier reforms such as removing all controls over bank interest rates. Yet taken together, the incremental steps promise to reach enough critical mass to sustain reform momentum and help the world’s second-largest economy shift down fairly smoothly after decades of red-hot investment-fuelled growth. It’s a 21st century version of Deng Xiaoping’s ‘crossing the river by touching the stones’ strategy of cautious economic experimentation in the 1970s and 1980s. The caution is still there, the difference is today China is crossing that river in many spots at once and the water is probably deeper. Economists say there is no substitute for fundamental changes if China is to succeed in its transformation from bureaucratically-run, pollution-spewing industrial powerhouse to a more balanced, market-driven economy. However, reforms such as freeing up bank interest rates or dismantling state monopolies will cause much short-term pain, and provide gains only in the long-term. With the economy expected to grow by 7.3 per cent this year, the slowest in 24 years and close to the level Beijing believes is needed to preserve financial and social stability, those reforms will have to wait. “We are doing easier ones first and leaving the difficult reforms for later,” said Xu Hongcai, senior economist at China Centre for International Economic Exchanges, an influential think-tank in Beijing. But Xu and others are encouraged by the progress so far and the consistency President Xi Jinping and Premier Li Keqiang have shown in pushing for a greater role for markets across the economy. Since November, when Communist Party leaders adopted a reform blueprint for the rest of the decade, no week has passed without new initiatives in areas ranging from the environment, resource pricing to capital flows and financial regulation, according to Reuters.