One Man’s Opinion: Do China, Japan And Europe Need To Undertake Structural Reforms To Realize True Potential?

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92835431The People’s Bank of China (the Chinese central bank) cut interest and deposit rates to boost growth Friday. China has a political problem and Chinese leaders need economic growth to provide legitimacy for the communist party, said Jamie Metzl, Senior Fellow at the Atlantic Council.

Beijing is trying to steer a little bit toward slower growth to rebalance and reform the economy. But every-time the economy faces headwind, Chinese leaders tend to panic a bit, as exemplified now. The rate cut is a plus in the short term but a worrying sign for the much needed reforms in the long term, he noted.

The PBOC said the rate cut is not a change in monetary policy, and the move is “within appropriate range.” Asked if the central bank’s language is nuanced or if it is missing the point, Jamie said the language is nuanced because the PBOC is injecting stimulus in the economy to avoid a slowdown and then saying it’s not getting off the reform-path.

Global markets gave a thumbs-up to PBOC’s Friday announcement because in the short-term all the major central banks are providing stimulus. But the fundamental problem is China’s economy is unbalanced because of over-capacity and misallocations of vital resources. They not only need economic reforms, they also need political reforms that will allow those balances to be made, and the leadership is not making huge progress in that area, he noted.

Asked if the political reforms are forthcoming, Jamie said China is betting the shop; they are betting the future of the country that they can have economic reform first. Political reform may come after that. The reform that is taking place currently is coming from top down; but outside investors would like to see both top-down and bottom-up reforms, he explained.

Asked if political reforms could be used to address the economy’s structural problems, Jamie answered in affirmative. China’s biggest problem is misallocation of resources and that happens because the Communist Party is too empowered. The state-owned enterprises and the big-businesses that are linked to the party are getting too many benefits and it’s squeezing the SME sector, stifling innovation, he observed.

When questioned as to who would benefit from the PBOC’s latest move, Jamie said countries that produce commodities are likely to be the biggest beneficiaries. Overseas manufacturing companies that export to China will benefit also in the short-term. Domestically, Chinese state-owned enterprises that are facing massive debt problems will benefit as well. China could potentially face a debt crisis because the highly leveraged state enterprises constantly need to roll over their debts and more credit is going to make it a little easier, he argued.

Asked if the PBOC’s move could have geo-political implications, Jamie said China gets a lot of respect because of its spectacular rise over the past 35 years. But in some ways, China is in a bubble. The expectation that China’s economy will eventually grow bigger than the US explains the global attention that China is receiving. But if growth slows and China looks less strong economically, then all of the elements of Chinese power will be brought into question, he explained.

Asked if the US has now turned the tables on China, Jamie answered in affirmative. Not long ago China was growing at 8-9 percent and the US was a basket case. But the US economy showed remarkable resilience while China finds itself in a very difficult position. Beijing now needs to transition the economy from an investment-led economy to an innovation and consumption-led economy, which is a huge task. The job will become more difficult if they try to contain the current political system and not allow for the kind of transformation that would be required, he noted.

Asked if Japanese Prime Minister Shinzo Abe’s policies will help the country, Jamie said in Abenomics, there are three arrows: quantitative easing, government spending and structural reforms. The third option is politically the most difficult to implement and if Abe fails to implement the third policy, then it’s back to money printing only to stimulate growth. That’s why Abe has called for snap-elections in December. Structural reforms are required in China, Japan and Europe to realize their potentials.

You can watch the video here.

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