News Analysis: China's rebalance makes progress, good to world economy

The Chinese economy is now undergoing rebalance from debt-fuelled investment towards consumption -- a process that might hurt growth, but will secure a solid foundation for sustainable development in the interest of both China and the world economy, experts said.

In its latest Global Economic Prospects report, the World Bank said that China faces the challenge of containing financial vulnerabilities in the short term, while putting long-term growth on a secure footing.

The bank expected Chinese economy to slow down to 7.1 percent in 2015, as China's structural reforms, such as a gradual withdrawal of fiscal stimulus and continued prudential measures to slow non-bank credit expansion, will weigh down on the growth.

Despite slower growth, experts widely consider China's reform trajectory and direction to be positive, as history shows that reform has helped it become one of the world's dominant economic powers.

REBALANCE WORKS

"People's feeling (about economic situation) is much more painful than the headline numbers indicating. But I'm not that pessimistic," Huang Yiping, a professor with the Beijing University, said at a forum held by the think tank Brookings in Washington.

Some positive changes are being seen in the economy, said Huang. The consumption share of the GDP is adjusting; the service sector is already bigger than the manufacturing sector, and that's why employment is not a challenge while the economy is slowing; innovation in areas such as online shopping, internet finance, and faster delivery is happening.

Ryan Rutkowski, a China research analyst at the Peterson Institute for International Economics, told Xinhua that China's external rebalance has made the most progress in recent years, such as the sharp decline in current account surplus to the GDP ratio, appreciation of the Chinese yuan, and increasing outward investment.

With a strong currency, Chinese companies and individuals could import more goods and services from the rest of the world, and Chinese companies are investing more in other countries, which is positive to both China's domestic economy and the global economy, said Rutkowski.

China's outbound investment reached 102.9 billion U.S. dollars in 2014, smashing through the 100-billion-dollar mark for the first time. China's Ministry of Commerce expected the country to become a net outbound investor in the near future, which will be a historic turning point.

HIGH EXPECTATION FOR REFORM

If China can fulfill the commitments made at the Third Plenum of the 18th Central Committee of the Communist Party of China in 2013, rebalance is likely to continue, said Rutkowski.

The World Bank estimated that the reform agenda announced in 2013 has the potential to raise China's output by 2-3 percent in the long term.

Arthur Kroeber, a non-resident senior fellow at the Brookings-Tsinghua Center, said at the Brookings forum that China's reform progress is going forward faster than the market expected.

In 2014, China rolled out a fiscal reform program which will redesign the tax system and the local government finance system within two years, while taking a step toward liberalization of the country's registered permanent residence policy, a very important move for freeing up labor mobility.

The program also abolished registered capital and administrative registration requirements for new businesses which removes the gatekeeper role of many local agencies, an avenue of corruption, and makes it easier to set up a new private business.

Moreover, it further liberalized deposit interest rate, and released draft rules for deposit insurance. It also introduced the linkage of the Hong Kong and China stock markets, a material change in the opening of the capital account.

Kroeber said, "This is a very impressive list, and I don't think you can find a single one (country) that has been able to accomplish so much in terms of basic economic reforms in one year."

At the Brookings forum, Lu Feng, a professor with the Beijing University, said that if China's economic reform goes smoothly and successfully, the increase in productivity will continue.

China will be able to provide more goods for the rest of the world and at the same time import more, which will be positive for the global economy, he said.

The professor said that, along with its increasing outward investment and the establishment of multilateral international development institutions, China can play a bigger and more positive role in the international framework and rule setting. Endi