China needs to change its economic model, the World Bank said recently, stating something Beijing knows all too well.
"The growth model that was based on fixed investments helped the Chinese economy take off. But reforms are necessary from hereon to allow for the financial system to support sectors that have reasonable growth prospects in the medium term," the Bank said.
That may be easier said than done.
While fixed asset investment growth has been in decline for the past two years, once growing at compounded annual rates of 20% or more and now down to the low teens, municipal level governments are still prone to throw money at job-seeking sectors regardless of return on investment.
All China-watchers know that the country is moving away from being a low cost export manufacturer and trying to become an entrepreneurial consumer-driven society. This is taking longer than expected. The market is impatient.
Oversupply remains a problem. During the commodity boom, China was busy building "ghost cities" and subway systems from scratch. That helped other emerging markets like Chile sell more copper and Brazil sell more iron ore. Not anymore.
The World Bank's China report turned China off in its first draft. The Bank said China's state run banks were distorting the market, and even brought up the dreaded hard landing issue. The Bank is calling for a more open financial services sector, and called on China to be more mindful of corrosive practices at its banks. On Friday, the Bank back-peddled a bit with Jim Yong Kim, its president, saying publicly that China considered its claims as being "illegitimate". The apology, of sorts, shows China's growing importance within the institution.
Regardless of China's concerns, the Bank's claims are indeed legit. Muni-lending has created dozens of automotive companies in China and dozens of solar panel makers that will struggle with reforms.
For example, the Chinese Automotive Manufacturing Association said it expects the auto-market to grow by just 3% this year, less than half their original forecast.
Iron ore and steel imports, in particular, have hit their peak, according to Mysteel Research.
The Organization for Economic Cooperation and Development, or OECD, also says that China's exhausted its old growth model. OECD said that China will eventually grow below 7% and stay there for a long time.
Of course, none of this is a surprise. Or particularly bad. The U.S. economy grows under 3%. And while China has three times the population, and is still a poor country, the slowdown is not expected to produce a recession.
China's Poverty Fight
World Banker Kim and China's Finance Minister Lou Jiwei signed an agreement July 16 to establish a $50 million fund to help reduce poverty. Kim met with leaders of the new Asia Infrastructure Investment Bank to discuss ways they can collaborate on eradicating poverty in central Asia.
These initiatives reinforce the growing partnership between the Bank and the Chinese. China is currently the Bank’s third-largest shareholder.
“China is a strong partner in development and a strong partner for the World Bank Group, and we share the commitment to ending poverty and boosting shared prosperity,” said Kim in a statement.
The trust fund, which is expected to start later this year, aims to enhance the cooperation between China and the World Bank Group and leverage financial and knowledge-based resources to help developing countries achieve sustainable development, something China is still learning to do itself. The fund will finance investment projects, operations, knowledge development and human-resource cooperation at both global and regional levels, the Bank said in a statement last week.
No other country in the world has come close to bringing people out of dollar-a-day poverty than China. While the old commodity hungry fixed asset investing model may be exhausted, it was that very model that took the bulk of China out poverty and turned many middle class Chinese into millionaires.
