Beijing’s Credibility Deficit; Political control reduces the prospects for serious economic reform

Beijing’s Credibility Deficit

Political control reduces the prospects for serious economic reform.

Updated March 6, 2014 6:50 p.m. ET

This week’s National People’s Congress in Beijing is being studied for clues as to the Communist Party’s reform intentions, although it’s hard to see why. Surely China has reached the point where what leaders say they intend to do is less significant than what ends up happening.

This is particularly so in connection with Premier Li Keqiang‘s announcement Wednesday that leaders will target economic growth of “about 7.5%” this year. That “about” is a new addition compared to previous NPC 004250.SE -0.89% sessions. It supposedly signals that Beijing could tolerate growth somewhat below 7.5% if it’s tilted toward domestic consumption rather than wasteful fixed investment.

When Beijing first reduced its growth target to 7.5% from 8% two years ago, observers said much the same thing. Although the official growth figure slowed to 7.7% last year, the leadership’s fixation on quantity over quality still bubbles to the surface more often than not. Witness the quiet monetary stimulus of 2012-13, stemming from Beijing’s apparent concern that growth would fall below 7.5%, which saw total credit expand roughly twice as fast as the economy as a whole.

Fixed investment, at above 50% of GDP, has increased as a proportion of output, the opposite of what Beijing’s reforms were supposed to bring. By some measures, China’s economy has become significantly less balanced in the rebalancing era.

This points up Beijing’s growing credibility problem. Policy makers have mastered the art of promising the right measures, which are not much in debate anyway: liberalize the financial system to allow the market to price and allocate capital; force large state-owned enterprises to operate more efficiently and reduce their role in the economy so that entrepreneurial private firms have opportunities to grow; rein in the local governments that drive so much malinvestment in public works and real estate. Delivery is another matter.

On all of these scores, Beijing this week has offered more or less the right ideas. Leaders propose a new deposit-insurance program, which in theory would give depositors the freedom to shift their money out of the large state-owned banks believed to enjoy an implicit government guarantee.

Beijing reiterated its expectation that state-owned enterprises (SOEs) will return more of their capital to the government via larger dividend payments, and leaders might encourage greater private ownership of SOEs through partial stock listings. A new program to allow local governments to issue bonds is supposed to increase transparency in local budgets, which currently are dominated by shadowy debt-fueled financing vehicles.

If history is any guide, however, reforms will stop short of the point where they would disrupt the political control over economic decisions that keeps the Communist Party in power. Beijing’s financial liberalizations haven’t seriously impinged on bank lending to politically favored borrowers, and there’s no telling how long Beijing’s resolve would last if this moment comes. Beijing will allow greater private investment in its SOEs, but it isn’t privatizing them. They will remain giant patronage machines, cut off from the productivity-boosting management shake-ups that privatization would bring. Previous efforts to control local-government debt failed when Beijing lost its nerve amid political push-back and fears of slowing growth, and it’s not obvious this time will be different.

The regime is attempting to be that rarest of creatures, the authoritarian that reforms its economy without losing its political control. At some point that will fail, and the leaders of the future will regret that their predecessors weren’t willing to sacrifice more political authority in exchange for more sustainable growth.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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