A chance to renovate (2)

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(China Daily) 14:54, September 22, 2013

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Consumption-led growth

For years, China's economy has been underpinned by massive investment and foreign trade. Today, such a growth model is no longer feasible with rising local government debt and a gloomy external environment for exports. The 4-trillion-yuan stimulus package, though significant in helping China ride out the global financial crisis, has led to structural contradictions in the economy, which need an urgent solution. As Premier Li pointed out in his speech, expanding domestic consumption is now a top priority when it comes to restructuring China's economy.

Since the ultimate purpose of economic expansion is to improve people's livelihood, the leading factor in driving consumption should be the people, rather than the government. "China's economic growth has become too expensive. Due to large amounts of capital input into the economy through fixed-asset investment by the government, five to six dollars of debt is created per every dollar of growth. Inefficiency is a serious problem," said Davies.

Adam Smith's view that a country's economic growth is closely linked to the size of its market means that a bigger market allows for a more defined division of labor, giving birth to more advanced and innovative technology. With rising productivity, more value will be generated, which in turn will push market expansion, said Zhang Weiying, an economics professor of Peking University, at the forum.

"China's biggest strength consists in its huge population and market," said Zhang. "Entrepreneurs should be encouraged to explore the new demands of consumers and create new growth points for the economy."

The question now is how to expand domestic consumption in a more moderate way. "From the perspective of both consumers and entrepreneurs, a sense of safety is a key issue," said Lin Yu, Co-CEO of NQ Mobile, a global Internet security service provider. For customers, only when basic public services are provided, such as education and health care, can they really release their consumption potential; for entrepreneurs, only when a problem like intellectual property rights infringement is tackled and a competitive but fair environment is established can Chinese entrepreneurs regain the enthusiasm to innovate and make long-term investments, Lin said.

Interest rate reform

"The removal of the upper limit on deposit rates is the last vital step to completely set the banking sector free," said Li Minxian, President of Guangdong Development Bank, at the forum. In July, China removed its floor on lending rates, but experts say removing the ceiling on deposit rates is more vital for the country to realize full interest rate liberalization. Removing the ceiling is widely considered to be the more "risky" move, however.

Despite a promise to give full play to the role of the market, the Chinese Government has been very cautious in liberalizing interest rates. "Eliminating the ceiling on deposit rates too quickly may incur fierce competition among banks, with the result being that deposit rates would shoot up much faster than lending rates," said Hong Qi, President of China Minsheng Banking Corp. Therefore, the interest margin would substantially shrink, forcing banks to step into high-risk fields. If these banks fail in managing risks, bankruptcy would be inevitable.

To make sure the banking sector would face the challenge smoothly, a deposit insurance system, as seen in developed countries, is needed, said Hong. More specifically, an insurance institution needs to be set up to provide financial assistance and ensure depositors can get their money back when banks are caught in crisis or on the brink of bankruptcy.

Although interest rate liberalization is fraught with risks and dangers, both commercial banks and the government insist that it is an indispensable part of China's financial reform.