CHINA WATCH: China At Crossroads So Govt Changes Lanes
By Owen Brown
A Dow Jones Newswires Column
BEIJING (Dow Jones)--China's new generation of leaders have chosen their legacy. After years of skewing economic growth to the east coast under the guidance of President Jiang Zemin, the government is now determined to raise the spending power of China's millions of farmers and workers.
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Premier Wen Jiabao, just a year into the job as head of the State Council, described it as a critical juncture for economic decision-making and a challenge as serious as the previous year's SARS outbreak.
At this month's National People's Congress, three key themes for China's new leadership were established - boosting farm incomes, revitalizing the rustbelt in the northeast and developing industry in the country's west.
China's gross domestic product grew at a a six-year high of 9.1% in 2003, but that expansion and wealth aren't being felt equally throughout the country.
These economic imbalances, Wen told an annual news conference at the Great Hall of the People, must be addressed appropriately.
"And that presents a new and very big challenge to the government," he said. "This test is no less severe than the SARS episode we had to deal with last year."
Such is the scope of the challenge.
The outbreak of severe acute respiratory syndrome in 2003 threatened to shut down China's tourism and retail industries and scare off foreign investors.
Outlined in the government's 41-page Work Report to the country's nearly 3,000 national delegates on the first day of the 10-day gathering at the Great Hall of the People, those policy responses mostly abandoned the big ticket investment projects that characterized Zhu Rongji's premiership and helped to drive economic growth in the past six years.
Rebalancing To Avoid Social Unrest
"I see it as a shift to focusing on agriculture and the more humanistic side of the government rather than just growth-oriented strategies," said Lynette Ong, a PhD candidate at the Australian National University's Contemporary China Center.
The central budget's 320 billion yuan ($1=CNY8.28) deficit spending this year is tailored to boost local infrastructure such as irrigation, water supplies and rural power grids, as well as subsidies for farmers.
Money is also aimed at improving public health and compulsory education, funding that helps rebalance a shortfall faced by local authorities as agricultural taxes and ad hoc fees are gradually phased out.
Tax and social security reform was also extended in the northeast to provide a platform for boosting investment in those three provinces.
Heilongjiang, Jilin and Liaoning, unlike the western region, already have the necessary infrastructure in place but lack capital to revitalize their moribund state-sector industries.
Despite the cutback on state investment spending, the western region will continue to attract the lion's share of public sector investment on infrastructure such as railroads, expressways and pipelines to link farmers and natural resources with markets in the big cities.
Christopher Devonshire-Ellis, managing director of investment consultants, Dezan Shira & Associates, said policies would focus less on the eastern seaboard and more on closing the widening disparity of incomes in the country's hinterland.
"If it (widening income gap) had continued, there would have been massive discontent," Devonshire-Ellis said.
"The new leadership is developing much more as a national government...using the eastern seaboard as a revenue generator but spreading that out into the interior."
Credit Being Diverted, Not Slowed
While China's government is being more tactical in developing its policy priorities, it faces another difficult balancing act.
The government, fearing an investment boom in some sectors, wants to curb high levels of credit growth but still ensure capital goes to areas in need of financing.
That won't be easy.
Premier Wen stressed that it will require not only the correct policy response, but also at the appropriate intensity.
In other words, the government wants to cool some sectors but without resorting to a big stick approach that could stymie investment across-the-board.
That means no interest rate hike as long as inflation isn't considered a major threat to the economy. This was at least the message from People's Bank of China Governor Zhou Xiaochuan at a news conference on the sidelines of the National People's Congress.
Some analysts hope jawboning as well as government and central bank task forces recently assigned to crack down on bank lending outside official guidelines will do the trick.
Carl B. Weinberg, chief economist for the U.S.-based independent analysts, High Frequency Economics, doubts measures taken to slow credit growth, such as raising the reserve requirement for banks last September and using planning officials to block investment in hot sectors, will have a lingering effect.
"These measures have a one-time effect on M2 growth but they don't do much to brake the growth of credit and money supply longer term," Weinberg said. "Investment demand is so great that money that would have gone into industries with excess capacity is quickly diverted."
A continuation of high paced loan growth, more than 21% year on year at the end of February, not only rekindles fears of a hard economic landing but also has consequences for China's international fund raising.
Fitch Ratings this week raised concerns about the threat posed to China by its high growth in lending and the constraint placed on a potential upgrade of the country's credit standing.
"We would need to see a further slowing in credit growth before we would raise China's rating," Brian Coulton, senior director of sovereign ratings at Fitch, told a conference.
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