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China’s Trial-and-Error Economy

HONG KONG – Chinese Prime Minister Li Keqiang’s work plan for 2015, revealed at this month’s National People’s Congress, highlighted the country’s shift to a “new normal” of 7% economic growth. The shift to slower growth poses serious challenges, but it also creates an important opportunity for China to ensure its long-term economic development.

China’s leaders recognize this opportunity, and are taking action to support the shift to more sustainable growth models. The finance ministry has raised the central-government budget deficit from 1.8% of GDP in 2014 to as much as 2.7% in 2015, and will allow highly leveraged local governments to swap CN¥1 trillion ($161.1 billion) of debt maturing this year for bonds with lower interest rates.

Likewise, the People’s Bank of China (PBOC) has provided monetary support, gradually lowering interest rates and reserve requirements. Because wages are still rising, the inflation target for 2015 has been set at 3% – higher than the actual 2014 inflation of 2%, even though producer-price inflation has been negative for 36 months. The PBOC also has projected a stable exchange-rate environment for this year – despite the steep depreciation of the Japanese yen, the euro, and emerging-economy currencies against the dollar – thereby promoting global stability.

These policies reflect a remarkable determination to continue on the path of structural reform, despite strong headwinds from the deteriorating external environment and domestic structural adjustments. In short, China’s government seems to have a clear long-term vision.