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POLITICAL ECONOMY
China reforms likely to be slow and steady: analysts
by Staff Writers
Dalian, China (AFP) Sept 12, 2013


Business executives and analysts on Thursday welcomed Chinese Premier Li Keqiang's pledges of reform in his inaugural speech at the World Economic Forum's "Summer Davos" meeting, but warned the process will be slow and incremental.

Li, who took office six months ago, delivered a message of change in the world's second-largest economy to global business leaders gathered in Dalian, in northeastern China.

"China's modernisation will not be accomplished without reform, nor will it be achieved without opening up," he said.

"Without structural transformation and upgrading, we will not be able to achieve sustained economic growth."

He pledged China would make its yuan currency freely convertible and allow bank interest rates to be set by the market -- but did not give any timetable for the moves.

Li's remarks came before a key Communist Party meeting in November but analysts said a "big bang" approach to change was off the table.

"China would be very ill-advised to call for a 'big bang', they will take progressive steps," said Hellmut Schutte, vice president of the China Europe International Business School.

James McGregor, greater China chairman of business strategy firm APCO Worldwide, added: "At the plenum, I think we are going to see some directional reforms, but I don't think you'll see a great-leap-forward reform.

"Li Keqiang is trying to reassure the business community that, if things look a little bit dodgy right now, wait and see because we are heading for more reforms," he said.

Li's comments followed Chinese authorities targeting foreign companies in the baby formula, drug and auto industries over high prices, as well as a corruption probe of British pharmaceutical firm GSK for alleged bribery.

China has repeatedly vowed to move towards making its currency fully convertible, meaning the unit could be freely bought and sold, allowing unrestricted movement of funds in and out of the country.

The Chinese yuan is only convertible for trade, to buy imported goods or turn revenue from exports back into local funds.

In July, China began allowing banks to set their own lending rates but the central bank still fixes deposit rates by administrative order.

A Chinese banker said deposit rates could be freed as early as 2015.

"For the last key steps in the liberalisation of deposit rates... commercial banks should be fully prepared," said Hong Qi, president of Minsheng Banking Corp.

"It would increase competition, and we might have 'interest wars' so to speak," he added.

A US official urged China to open further to foreign investment.

"It will strengthen your economy, it will attract know-how, it will lead to best practices, it would be beneficial for both China and the foreign investors," said Francisco Sanchez, US Under Secretary for International Trade.

China's reform promises come despite a slowing domestic economy, which analysts say could make Beijing less likely to take risks with big change.

Li defended the government's decision to use a stimulus package to spur growth and played down fears over huge local government debt, which he said was "manageable".

During the global financial crisis in 2008, China launched a 4.0 trillion yuan ($645 billion) stimulus package, but easy credit caused local governments to run up borrowing.

At the forum, Adair Turner, senior fellow of Britain's Institute for New Economic Thinking, described China's debt levels as "very high and rapidly rising".

"Investment has been very heavily funded with the credit expansion," he said. "There is a dangerous reliance on increasing leverage, and actually we are seeing in the last few months an acceleration."

Li indicated the government was willing to accept slower economic growth as it made structural reforms, including a shift to domestic consumption instead of government-led investment.

"Though lower than the near double-digit rates seen in previous years, growth in the neighbourhood of 7.5 percent is still considered high for any major economy in the world," he said.

China's economy expanded 7.7 percent last year, the slowest growth since 1999. The government is targeting economic growth of 7.5 percent for this year.

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