Stable China economy before reform

By Nick Edwards, Reuters

BEIJING — China’s new leaders must stabilize the economy this year to keep employment high while avoiding a surge in housing prices and inflation that could undermine reforms needed to overhaul the country’s export-oriented growth model. Without stability, incoming President Xi Jinping and Premier Li Keqiang, who are set to be confirmed in March, have no chance of delivering a slew of reforms they say are needed now to tackle a host of financial, industrial and income imbalances that threaten China’s future. Failure to close one of the world’s widest rich-poor gaps or deflate a dangerous property bubble could create a backlash that could even break the Communist Party’s grip on power. “Stabilizing growth is a pre-condition for delivering on reform and the new leadership has a long list of urgent issues,” said Xiang Songzuo, chief economist at the Agricultural Bank of China, one of the country’s “Big Four” state-backed lenders. “They have to prioritize,” Xiang said. Inflation Legacy

Many analysts say the top priority is to ensure growth does not deviate far from the 7.5 percent rate likely to be set as the 2013 target during China’s annual meeting of parliament in March — too slow puts jobs at risk, too fast and speculative investment activity jumps. The closing months of 2008 offer the most recent precedent. Back then, the global financial crisis bought world trade to a near standstill, costing an estimated 20 million Chinese jobs and forcing Beijing into a hasty 4-trillion-yuan (US$640 billion) stimulus package that inflated a real estate bubble and sent local governments on an infrastructure-led, borrowing binge. China has fought since to contain the inflation and the 10.7 trillion yuan in local government debt it spawned.

Beijing does not relish a repeat and so must act, and with some urgency, given the imbalances inherent in the export-led, factory-driven development model China has followed since 1978. Its new leaders must come up with ways to turn legions of cheap, assembly-line exporters into world-beating product-makers, while making domestic consumption the economy’s prime focus to ensure growth is more balanced. Ingrained Inequality The most striking imbalance is its population of 1.3 billion people. China has 2.7 million U.S. dollar millionaires and 251 billionaires, according to the Hurun Report, but 13 percent of its people live on less than US$1.25 per day according to United Nations data and the average annual urban disposable income is just 21,810 yuan (US$3,500).