Tag Archives: World Bank

Making The Half Empty Glass of Financial Reform Go Away

THAT CHINA’S FINANCIAL system is “unbalanced, repressed, costly to maintain and potentially unstable” will not brook many arguments among policymakers in Beijing. It is, after all, why they are deep into an extensive programme of financial reforms, reforms that are seen as central to the long-term rebalancing of the economy.

It is also why “a weakly regulated shadow banking system” and a tendency of “wasteful investment and over-indebtedness” that is the consequence of a “traditional investment-driven growth model shaped by heavy state intervention” are also being tackled as policy priorities.

However, it is one thing for officials to know that and quite another to have it told to them publicly by the World Bank.

The phrases quoted above were all contained in a section of the Bank’s latest China Economic Update, published mid-week, which called for a quickening of financial-sector reform. The entire section has now been removed from the update, because, the Bank says, “it had not gone through the World Bank’s usual internal review and clearance procedures.”

Whatever, this Bystander is tempted to say. Any red faces at the Bank are probably due as much to the tongue lashing that would have come from Beijing as from the embarrassment of having to redact a section of a report post-publication.

With share prices on the Shanghai exchange in meltdown and the signing ceremony earlier this week setting up the Asian Infrastructure Investment Bank (AIIB), a putative rival to the Bank’s regional clone, the Asian Development Bank, and longer term to the Bretton Woods’ multilateral institutions as a whole, there could be some understandable sensitivity on both sides. Also, China readily takes public offense at any perceived criticism by any institution seen to be in the pockets of the U.S. and the EU — and the World Bank has previous in this regard.

What, to our mind, lies behind this particular spat is that when the International Monetary Fund comes to consider in October whether to endorse the renminbi as an official reserve currency by including it alongside the dollar, sterling, euro and yen in the basket of currencies that comprise its Special Drawing Rights, progress on China’s financial reform — and particularly whether renminbi interest rates are market-based — will be a key criterion.

The IMF reviews the components of its SDRs every five years. It would be an unwelcoming rebuff for China, which is being ever more assertive in claiming its place at international top tables, if it were made to wait until 2020 for inclusion.

As recently as March, Prime Minister Li Keqiang told Christine Lagarde, the IMF’s managing director, that China intended to speed up the financial sector reforms needed to meet the stringent requirements of stability and liquidity demanded of a reserve currency.  With IMF staff preparing their internal assessments for the 2015 SDR review around now, this is not a time when Beijing will brook any public plain-speaking about the pace of financial reform.

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World Bank Adds Its Voice To Those Calling For China To Slow Its Growth

THE WORLD BANK is lending some international credibility to China’s likely switch to a 7% annual GDP growth target next year. In its latest economic update the Bank says 7% growth would not hurt China’s labor market, an indicator watched closely by the leadership in Beijing for any sign of incipient social unrest.

Attempting to sustain the current offical target of 7.5% annual GDP growth hampers the government efforts to rebalance the economy towards being driven by domestic consumption, the Bank says. “The current emphasis on meeting short-term growth targets will make it more challenging to implement the policies necessary to shift growth to a more sustainable medium-term path.”

In that the Bank echoes the words of the International Monetary Fund. In July the Fund said that Beijing should set a growth target of 6.5%-7% for 2015 and not introduce any stimulus measures unless the economy looked likely to decelerate to a pace below that.

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Xi Speaks Of 7% Growth

An unexpected signal from President Xi Jinping that China’s growth this year may slow more than the official forecasts have let on. Speaking informally at the Asia-Pacific Economic Cooperation meeting in Indonesia, he said that a 7% growth rate was “within a reasonable and expected range.” And, this Bystander expects, on plan. Xi dismissed any notions that China’s economy was facing a hard landing, saying that a “seven percent annual growth rate will suffice” to meet China’s medium-term goal of doubling per capita income by 2020. “The slowdown of the Chinese economy is an intended result of our own regulatory initiatives,” he said.

This Bystander also recalls the fuss in July when finance minister Lou Jiwei spoke of 7% annual growth for this year after the U.S.-China Strategic & Economic Dialogue. Xinhua swiftly added to the record the missing half a percentage point from this year’s official growth target. We doubt that in this case Xi misspoke (or that state media will do any after-the-event re-reporting of Xi’s words), and it should be noted, the president did not specifically forecast 7% as the growth rate for this year. That number is also the annual growth target in the current five-year plan. But it is the clearest public signal to date of where the leadership sees the economy headed.

Meanwhile, the World Bank has joined the caravan of those cutting their forecast of economic growth for China. In its latest semi-annual regional economic update, the Bank says it now expects GDP growth to be 7.5% this year and 7.7% next. That is down from 8.3% and 8% in its previous forecast published in April. The Bank expects the slowdown in China to cast its shadow over the region. It now forecasts growth for East Asia of 6.0% this year and 6.4% in 2014. That is down from 6.5% and 6.7% respectively in its previous forecast.

The Bank also highlights the increasingly conventional wisdom that China’s growth model of investment-heavy stimulus supported by credit expansion has run its course. Beijing must focus on containing the rapid growth of credit and tighten financial supervision, it says. The Bank  remains concerned by the levels of local government debt and the rapid rapid expansion of the shadow banking system. This, the Bank said, posed “serious challenges”. The Bank also credits China with making some progress in rebalancing its economy, though “the economy has yet to make the decisive turn toward consumer-based growth”.

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World Bank Raises China Growth Forecast For 2013

The World Bank raised its forecast for China’s GDP growth in 2013 to 8.4% from its projection of 8.1% made in October. In the latest edition of its East Asia and Pacific Economic Update, the Bank says it expects China’s growth rate to be 7.9% this year, down from 2011’s 9.3% and the lowest rate since 1999. Weak export growth and government efforts to deflate the housing bubble weighed on growth. A sign of how much global demand has weakened during this year is that back in January, the Bank had forecast 8.4% growth for 2012.

The Bank says that a pick-up in factory output and investment suggests that the recent slowdown in the economy has bottomed out in the wake of easier credit conditions and public spending on infrastructure. The effects of both of these stimuli will be felt more powerfully next year. Beyond that, the Bank projects that China’s potential growth will gradually slow, as investment levels off and productivity increases and labor force growth start to slow. Its 2014 projection of 8% growth reflects that.

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China’s Economy Seeing Slowing Faster Than Expected

The World Bank works closely with China’s economic policy makers which gives its latest cut in its forecast for the country’s growth rate this year additional weight. The Bank is now estimating 7.7% growth for this year, sharply down from the 8.2% it forecast as recently as May. Its forecast for some recovery in 2013 has been similarly cut, to 8.1% from its previous 8.6%. With weak international demand for China’s exports and lower investment growth causing the slowdown, the Bank also fears that there is a risk that the slowdown could be deeper and longer lasting than expected.

The consequences of this on growth in the region are laid out in its latest report on the economies of East Asia and the Pacific.The Bank now expects developing East Asia to grow by 7.2% this year and 7.6% in 2013, down from earlier estimates of 7.6% and 8.0%, respectively. The Bank does not expect Beijing to introduce a large stimulus project, but thinks it will continue to rely on easier monetary policy and the bringing forward of planned infrastructure projects to prod growth into moving at a faster pace.

That is in keeping with the Bank’s belief that because growth in developed countries will remain modest, at best, continued growth in the region’s developing economies will driven mainly by strong domestic demand. It also calls for continued structural reforms, improvements in the business climate and investments in infrastructure and education systems, which it says will become more important.

A bolder version of the some of the same policies has been urged on China’s leader presumptive, Xi Jinping, by Strategy and Reform, a domestic think thank. They say that China risks economic malaise, deepening unrest and ultimately a crisis that could loosen the Party’s fast grip on power unless stalled economic reforms are pushed forward. Whether Xi is prepared to take on the vested interests that that will involve, or instead treat China’s economic problems as cyclical rather than structural will define his leadership as much as achieving the apex of its fast growth has done for the outgoing Hu-Wen generation of leaders.

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Railroading China’s Environment

A bevy of red-crowned cranes fly over the wetland of the Zhalong Nature Reserve in northeast China's Heilongjiang Province, on July 25, 2009. Located near Qiqihar City in northeast China's Heilongjiang Province, the Zhalong Nature Reserve is a perfect habitat for red-crowned cranes, and also a perfect observation site for bird fans at home and abroad. (Xinhua/Zhang Xiaolong)

Construction of the Harbin-Qiqihar railway was suspended at the beginning of this month because its work camps threatened the Zhalong nature reserve (above), a wetlands nesting ground for red-crowned cranes. Perhaps surprisingly, the Ministry of Environmental Protection is proving itself a diligent guardian of the environment in the face of the rapid expansion of the country’s rail network. Even more surprisingly, the scandal-tainted railways have shown themselves to be pioneers in adopting environmental impact analysis and management into their expansion, according to a new paper* by the World Bank.

The world’s largest national railway development program for more than a century poses significant challenges to the environment and humans alike. There is no sugar-coating that. Some new lines cross sensitive ecosystems, are built in fragile mountain ecosystems, pass through densely populated areas, or threaten the traditional social and geographical connections of the countryside.

Environmental and social protection has been integrated into rail infrastructure development on six fronts, the paper says:

  • The simplest and most obvious one: routing lines around environmentally sensitive sites.
  • Implementing mitigation measures where social and environmental impacts are unavoidable, such as the provision of safe crossings under or over the new lines for humans, domesticated animals, wildlife and irrigation.
  • The use in mountainous areas of tunnel-bridge-tunnel schemes instead of embankments, which are at risk of landslides and erosion, despite bridges and tunnels costing half as much again to twice as embankments.
  • Recycling of waste materials.
  • Minimizing the impact of noise, vibration and erosion during construction.
  • Preserving of cultural resources and historical artifacts. The environmental impact assessment that every infrastructure project has to have includes a physical cultural resources survey. Where relics are suspected and impacts probable, detailed site investigation and excavation by experts is conducted prior to construction.

Building railways is disruptive and destructive, beyond doubt. Few residents who have had new lines pushed through where they live would argue with that. While the World Bank paper, No 6 in its series on China transport topics (Nos. 3 and 4 here), casts the efforts of the railways in a favorable light in terms of their sensitivity to the environment, its authors have a number of recommendations for further improvement:

  • Current environmental regulations and procedures remain specific to each railway administration. The authors suggests introducing an industry-wide code of practice for railway construction environmental management to standardize good practice and ensure uniform application.
  • Environment impact assessment documents are technically strong, but focus on the biophysical environment. Assessments would benefit from deeper analysis of the broader social and cultural impacts, such as land acquisition and involuntary resettlement, and on induced or cumulative impacts.
  • The environmental management plan that is often prepared in connection with any bank financing for each project should become mandatory. Such plans turn the conclusions of an environmental impact assessment into measures incorporated in to project design, bidding documents and implementation.

China: The Environmental Challenge of Railway Development  by Peishen Wang, Ning Yang and Juan D. Quintero, World Bank Office, Beijing. China Transport Topics No. 6,  June 2012.

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World Bank Cuts 2012 GDP Growth Forecast For China

Hard on the heels of the OECD’s latest economic outlook, comes the World Bank’s biannual regional economic update. This cuts the Bank’s forecast for China’s GDP growth for this year to 8.2% from 8.4%, bringing it in line with the OECD and IMF’s forecasts. But the Bank is less sanguine than the OECD about fast-tracking state infrastructure projects to stimulate the economy if necessary–which some in Beijing are promoting in the face of the economic slowdown. (Update: State Council moving in that direction.) The Bank remains nervous about inflation, which it sees ticking up in 2013 to 3.6% from 3.2% this year, though not regaining last year’s 5.4% and under the government’s 4% target.

The Bank thus also calls for restraint in easing monetary policy further, suggesting only using further cuts in banks’ capital reserve ratios, unless further falls in inflation turn real interest rates substantial higher. Instead, it says more reliance should be placed on easing fiscal policy in areas that match long-term social policies.

“Fiscal measures to support consumption, such as targeted tax cuts, social welfare spending and other social expenditures, should be viewed as the first priority,” the Bank says. “Stimulus would ideally be less credit-fuelled, less local government-funded, and less infrastructure-oriented.”

Like the OECD, the Bank sees the economy regaining momentum next year. Its conservative stance to dealing with the current slowdown leads it to forecast 8.6% GDP growth in 2013. The more stimulus-accepting OECD forecasts 9.3% GDP growth for next year.

The Bank’s big concern is that a slump in Europe will be transmitted through China to the rest of Asia. China accounted for two-thirds of the region’s $592 billion shipments to Europe in 2011. It would be the first to suffer if the crisis in the eurozone worsens, the Bank says, before passing the effects on to others in Asia by dint of its position as  the centre of the region’s production networks.

The World Bank’s numbers:

China's GDP growth, industrial production, employment, real wages and consumer price inflation

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