The world watches reform in China closely. Some perceive that slower economic growth has an impact on reform. Is there a trade-off between the two?
China’s short term rate of economic growth has been coming down recently. That is largely explained by government policy measures to address inflation. They’ve been quite successful at that and although there is some concern outside of China that the growth rate might be coming down too quickly, it still is at a healthy mid seven percent range.
However, there has been criticism that China has been less reluctant to undertake reforms in recent years. In the area of the currency in the capital account there has been reform but the momentum behind the reform program is not as strong as it had been. This is most likely attributable to the major leadership change coming up at the end of this year and a very strong emphasis on not doing things that may destabilise the economy or the society. Having said that though there isn’t a trade off in my view between reform and economic growth.
To sustain growth into the future China will need to keep moving forward with reforms and I think the most important reform, and China indicates that it is aware of this, is reform of the capital account. I think we will see, after the leadership change and into next year, a pick up in the reform momentum, particularly focussing on bringing the cost of capital domestically much more into line with international capital costs.
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