Thursday, November 6, 2014

Can China survive the 'new normal'?

Nov 05, 2014

By Kor Kian Beng China Bureau Chief In Beijing

CHINA has a new catchphrase - "new normal" - that its officials and state media often use now to stress that Chinese Communist Party (CCP) chief Xi Jinping's signature policies are here to stay.

The "new normal" China, according to Mr Xi, abstains from taking broad stimulus measures despite slowing growth. It also deepens the rule of law to bolster the fight against graft and excesses.

While this is slated to bring about more balanced economic growth and a cleaner bureaucracy, there are potential risks if the "new normal" is not managed well.

But first, evidence of the "new normal" propaganda campaign. It was Mr Xi who first used the phrase in May this year as he called for adjustment to a "new normal" in China's economic development, by which he meant a slower, more sustainable pace of growth.

Just last month, officials of the Development Research Centre - a think-tank linked to the State Council - used the phrase at different events. In August, the People's Daily, the CCP's mouthpiece, ran three front-page commentaries over consecutive days, highlighting the merits of a slower but more sustainable economic growth model.

Xin chang tai, which is the Chinese term for "new normal", is also used by state media to describe Mr Xi's work in the political realm.

The recently concluded CCP fourth plenum is said to have added a new dimension to this "new normal" of slower growth, with a focus on deepening the rule of law to strengthen the anti-graft fight and advance difficult economic and social reforms.
The move to a "new normal" of slower growth is not unexpected for an economy after three decades of double-digit expansion.

China is also approaching the Lewis turning point - when a developing economy runs out of cheap labour and has to rely on innovation to sustain medium- paced growth and break through the middle-income trap to become a developed economy.

But the catchphrase is trotted out so much these days, it is clearly being used as a propaganda tool to help achieve Mr Xi's political and economic aims. The "new normal" refers to "getting everyone to acknowledge that the Xi era has begun", according to China observer Steve Tsang at Nottingham University.

It is also China's way of calming nerves arising from the latest economic data showing third- quarter growth of 7.3 per cent - a five-year low. This is to be expected, Chinese officials are saying.

"The message that there should be no panic is intended for local governments, many of which are agitating for more stimulus measures as they too are facing pressure from the enterprises and people over a slowing economy," said Beijing Institute of Technology economist Hu Xingdou.

Government stimulus has become a taboo topic in China, due to a 4 trillion yuan (S$843 billion) spending package in 2009 that has caused lingering problems such as overcapacity, corruption and staggering government debt.

Under Mr Xi, China has shown greater resolve in weaning itself off its obsession with gross domestic product growth, adding other factors in the key performance index in official appraisals, and opening up state-dominated sectors to the market.

The "new normal" campaign is thus also a warning to officials not to expect any reversal of these policies or initiatives any time soon, said Singapore-based analyst Li Mingjiang. "The new leadership is using the phrase 'new normal' to convey its new style of governance," he added.

In a way, the political and economic "new normals" are smartly and deftly intertwined.
The CCP knows its new growth path could rock stability and, in turn, create a political challenge to its rule, especially if the economy were to slow sharply and jobs vanish. It thus needs the anti-graft and austerity campaigns to ensure that the party improves its public standing, which has been battered due to official corruption and inefficiency.
The "new normals" promise a cleaner government to increase market efficiency. Slower but quality growth could undo environmental damage. A stronger rule of law could improve social fairness and make China a more appealing place for talents.
The "new normal" policies should also benefit foreign companies as they make it easier for them to do business in China, said Prof Li of the S. Rajaratnam School of International Studies.

"The success of China's economic restructuring will also provide a better and safer investment environment for foreign enterprises in China," he added.

Still, there are risks that the CCP has to juggle well.

The anti-graft campaign has reportedly already caused division in the CCP and left cadres unwilling to push bold reforms. Some organisations are bereft of suitable talent to replace sacked leaders, thus stalling reforms.

Deliberately maintaining slower growth without introducing effective policies to raise innovation could have adverse effects.
Official estimates say some 40 per cent of Chinese enterprises face potential bankruptcy and job cuts if they do not innovate sufficiently amid a slowing economy.

For China to survive the "new normal", one key ingredient is to ensure a gradual slowdown of the economy and prevent a sharp contraction that could throw its longer-term plans into disarray.

A severe slowdown means the government might have to intervene more in the economy, especially in the event of severe loss of jobs, instead of restructuring the economy model to one less reliant on exports and investment and more fuelled by domestic demand and innovation.

But doing little amid a sharp slowdown and sticking to the "new normal" could also threaten the social and political stability. The trick is knowing when to stay the course of maintaining slower growth and implementing reforms and when to step in and do so appropriately.

It also requires a strong leader able to withstand calls over time for economic intervention or a cooling down of the anti-graft and austerity campaigns.

For now, it helps that Mr Xi appears to be firmly in control of almost all branches of the CCP.

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