China set for painful & treacherous change of economic model
While recent volatility in financial markets has unsettled the global economy, the world should have confidence in China’s future, Li Keqiang, Chinese premier, on Thursday told participants in the opening plenary of the World Economic Forum’s ninth Annual Meeting of the New Champions. The premier said the government was committed to the “painful and treacherous” process of transforming its economic model from one that was over-reliant on investment and manufacturing to one driven more by consumption and services.
“China is not a source of risk, but a source of growth for the world economy,” Li said. While he acknowledged that China’s transition to an economic growth model driven by consumption and innovation will be “painful and treacherous”, he explained that “due to the policies that have been adopted, positive factors in the economy are building up. The fundamentals have remained unchanged.” He added that "If there are signs that the economy is sliding out of the proper range, we have the ability to deal with the situation. China will not have a hard landing.”
“China will never resort to a currency war,” he added, in a reference to global worries over the recent devaluation.
The World Economic Forum’s Annual Meeting of the New Champions is taking place in Dalian, the north-east port city, from 9 to 11 September. The meeting is a leading global gathering on innovation, entrepreneurship, science and technology. It is held in close collaboration with the Government of the People’s Republic of China, with the support of the National Development and Reform Commission (NDRC). The meeting has brought together more than 1,700 participants from 90 countries under the theme, Charting a New Course for Growth.
In his speech, Li said that, despite the slowdown in China’s growth from its previous double-digit performance, Chinese authorities “have plenty of tools at our disposal to take targeted measures and, at the same time, build momentum for sustainable economic growth in the long term.” Because of China’s economic resilience, its adoption of a range of technologies and their application to its broad industrial base, “China is in the process of a new type of industrialisation,” Li explained. “This is generating enormous potential for stimulating domestic demand.” China will continue to open up its economy and liberalise sectors including its financial system, with the renminbi gradually achieving full convertibility. “We will continue with our reform efforts, but in a step-by-step manner,” Li vowed.
Most encouraging for China’s transition to a new economic growth model is the “massive wave of entrepreneurship and innovation across the nation,” Li said. New ways of financing and innovation in R&D are completely changing business models and industries. “Creativity is the greatest asset for development,” he said.
“Mass entrepreneurship and innovation are bringing strong support for employment.” He called for greater international collaboration, including global cooperation on managing production capacity by taking advantage of each country’s comparative strengths. “When it comes to production capacity, there will be some competition, but we need to work together. We are committed to opening up for win-win benefits.” Li added: “China will never resort to a currency war.”
Answering a question about China’s drive to promote entrepreneurship and innovation, Li said that China continues to welcome overseas investment in its development. “I have confidence that foreign partners will bring not only capital, but also expertise. The Chinese government will do its utmost to protect intellectual property rights in China.”
The Financial Times reported yesterday that China has tightened its capital controls, in a sharp reversal of its market liberalising rhetoric, as it struggles to contain the fallout from last month’s devaluation of the renminbi.
"The August 11 devaluation unleashed turmoil on global stock markets and policy confusion at home, forcing the central bank to spend up to $200bn to support the currency. The prospect of an interest rate rise in the US has further encouraged capital flight.
The State Administration of Foreign Exchange (Safe), the unit of the People’s Bank of China in charge of managing the currency, has in recent days ordered financial institutions to step up checks and strengthen controls on all foreign exchange transactions, according to people familiar with the matter and an official memo seen by the Financial Times."
“The equity market has very limited impact on the real economy,” Min Zhu, deputy managing director, International Monetary Fund (IMF), said stressing more the need for China to continue pursuing its reform agenda aimed at transforming its economic growth model from one focused on capital investment and manufacturing for export to one driven more by consumption and innovation. The IMF is forecasting that China’s GDP growth next year will be 6.3%. Zhu, a native of China added: “Global growth is still moderate so it is very important for us to work for growth. The key driver of growth is structural reform. Meanwhile, the financial sector risk is building. So countries need to monitor the financial sector to ensure financial stability.”