Can Chinese Leaders Balance Reforms and Growth?

China

China is continuing to assuage markets amid global worries about the ramifications of a Chinese slowdown. The government is hoping to implement largely liberal reforms, open up the country’s economy, and transition to consumer-driven growth, all while still growing enough to push the global economy forward.

Specifically, the government has repeatedly emphasized there is a floor on the amount of growth that it will accept, saying anything less than 7 percent would facilitate action from the world’s second largest economy. Moreover, China has maintained a commitment to prudent monetary policy. Zhu Baoliang, chief economist at the State Information Centre, a major Chinese think-tank, told Reuters, “Fiscal policy will play a bigger role in supporting the economy, as we need to maintain prudent monetary policy.”

The government is also tackling substantive reforms as well, committing to a liberalized yuan in the future, and acknowledging U.S. concerns about intellectual property theft. The country is even scrapping the minimum rate required of lenders, allowing them to compete for the first time.

The bankruptcy of Detroit has also caught the eye of the political leadership in China, prompting the government there to more closely examine its own debt risk. Provincial and local governments experienced a large amount of borrowing, along with the Chinese economic boom in years past. However, as things have slowed down and the country tries to change direction, solvency will be a key issue for the government. China has placed a ban on the construction of new government office buildings for the next 5 years, in order to help stem costs.

Markets have been concerned over the future of China, though former Goldman Sachs (NYSE:GS) Asset Management Chairman Jim O’Neill liked what the government had to say about reform, telling CNBC that their policy plans for the future were “pretty persuasive.” O’Neill pointed to both the liberalization of the financial sector, along with attempts to boost consumer spending, as some of the persuasive reforms, even if that did mean a slowdown in growth.

He also maintained that a slowdown in GDP expansion was not the end of the world for markets and investors, saying, “If the China GDP slips from 10 to 6 percent, but the consumption rate is staying as strong or strengthening, that’s what should be mattering.” As such, he recommended looking elsewhere for returns on investments and growth, adding, “Caterpillar won’t be at the front of the likely winners, nor would many other heavy industry and commodity-related companies.” He pointed to consumer goods as a better option.

O’Neills comments come at a time when the Chinese slowdown has worried many global markets, including Australia and Europe. European exports to the country are critical to EU efforts to grow, and Australia’s commodity industry is heavily dependent on a thirsty Chinese marketplace.

However, China is not going to preclude growth from reform, especially in the face of jittery markets. Other factors, such as the end of quantitative easing, are weighing on investors and capital already. China’s official news agency, Xinhua, summarized the country’s new strategy following the most recent meeting of the state’s leadership: “The central authorities will continue to coordinate the multiple tasks of stabilizing growth, restructuring the economy, and promoting reforms.”

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