International | Mar 15 2010
By Chris Shaw
Growth in the Chinese economy this decade has been consistently strong, Westpac noting GDP rose by between 10% to 13% in 2003-2007. As the bank's senior international economist Huw McKay notes, this was achieved even when tighter policy measures were introduced to stem the rate of growth from time to time, with 2004 one example.
In 2008 Chinese policymakers again introduced some policy tightening measures and this time the result was more successful, though as McKay points out this coincided with the onset of the global financial crisis.
The reason the 2008 moves were successful in McKay's view were they were aimed at limiting aggregate demand, whereas in 2004 the policies were targeted more at specific sectors of the economy.
What the 2004 moves achieved was sectoral rotation, as for example McKay notes at the time the heavy industrial sectors were targeted for slowdown and this allowed other projects that had been struggling to be brought to fruition. One example of this in both 2005 and 2009 was a subsequent rotation from manufacturing to infrastructure projects.
One issue McKay notes is that Beijing and local governments have conflicting incentives, as locally growth is generated by fragmentation and proliferation, but central policymakers want to concentrate certain industries and control them with legislation.
The problem in McKay's view is as soon as a small firm realises it may be forced to close because it is below a set threshold, the firm simply invests more to reach the required size, often with the help of local authorities and bankers.
What this means, according to McKay, is without an aggregate tightening of policy settings the only way to bring the economy to a halt is to prevent sectoral rotation. This is a very difficult objective to achieve, given a large catalogue of obvious projects associated with China's urbanisation.
As examples of what is required, McKay notes Chinese capital stock per worker is only 11.5% of Japan's level at present and there is a need for 170 mass urban transit systems by 2020. As well, higher logistics costs than in the US and a need for more than 100 million dwellings to house rural to urban migrants suggests current policy settings are unlikely to change anytime soon in his view.
Looking at the economy now, McKay suggests some sectoral rotation from the public to the private sector appears to be underway. With local governments leveraged up and trying to complete projects, selective policies from Beijing are unlikely to be able to bring this undone quickly.
The question then is will policy go beyond selective measures to a more overt policy stance to bring growth under control? McKay suggests the answer to this is negative, given the renewal of accommodative monetary and active fiscal policies at the recent National People's Congress.