A Collective Sigh of Relief - Deloitte

Longer term
Recovery overseas will eventually lead to a revival of strong
growth in China. Or will it? The problem is that, although
China seems destined to avoid a “hard landing” for now,
there are reasons to worry about this further down the
road. The ability of China to maintain growth in the wake
of the crisis in 2008–2009 was due to massive government
support for investment. This investment now represents
48 percent of GDP, widely viewed as unsustainable as
has been discussed on these pages in the past. That is
why there has been much discussion lately about reform
in China.
The government recently cooperated with the World Bank
in producing a report titled China 2030, which offers ideas
on how China can sustain growth going forward. The
report says that China’s current economic model is not
sustainable and must be changed. It calls for more privatization
of state-run enterprises, more reliance on market
forces, the end of restrictions on internal migration, a
boost to the social safety net in order to encourage more
consumer spending, more transparent capital markets in
order to funnel capital to the most profitable investments,
and better fiscal controls for local governments that are
currently laden with debt.
It is not likely that these or other reforms will be enacted
this year. That is because 2012 is a year of transition to
new leaders. The outgoing Premier, Wen Jiabao, has
spoken out about the urgent need for reforms. Incoming
Premier Li Keqiang said that China must “deepen reforms
on taxes, the financial sector, prices, income distribution,
and seek breakthroughs in key areas to let market
forces play a bigger role in resource allocation.” Yet, there
China
has been nothing more specific than this. Consequently,
there is some uncertainty as to nature and timing of
future reforms. Failure to reform could allow imbalances
to fester, leading to a crisis in the future. Reforms, on the
other hand, could be disruptive and might challenge the
interests of those that benefit from the current system.
As such, China has no easy path. Meanwhile, the leadership
debates the proper role of government, the growing
problem of income inequality, and the degree to which
changes in the political system are needed to ensure
economic reform. Stay tuned.
Kicking the can down the road
In a year when political power will be transferred, the
government is evidently keen to avoid major disruption
to the economy. As such, it is likely that the government
will utilize fiscal tools to boost economic activity if the
economy faces even greater headwinds from abroad. In
addition, the government has shown a desire to avoid, or
at least postpone, the turmoil that might come from the
unwinding of imbalances. Specifically, as discussed in this
publication recently, local governments have accumulated
about $1.7 trillion in debts that many analysts deem unsustainable.
Moreover, a loss of revenue from weak land sales
has exacerbated the problem of servicing this debt. Many
analysts had recently been concerned about the possibility
of an imminent crisis if banks were forced to write down
these debts. Instead, the government has instructed banks
to roll over the local government debt, thereby postponing
the day of reckoning. Thus, there will probably not be a
crisis any time soon.
Geographies
21