Stephen Roach Warns China's Policy Incoherence Has Become Evident

Tyler Durden's picture

Authored by Stephen Roach, originally posted at Project Syndicate,

China was hardly lacking in policy pronouncements in the final months of 2013. From the 60-point reform program issued by the Central Committee’s Third Plenum in early November to the six core tasks endorsed by the Central Economic Work Conference a month later, China’s leaders proposed a raft of new measures to address the daunting challenges that their country faces in the years ahead.

But, seen in their entirety, the risk of incoherence has become evident. The Third Plenum initiatives, for example, have a strategic focus: promoting the economy’s long-awaited pro-consumption structural rebalancing. While the Work Conference’s core tasks embody the spirit of these reforms, they also reflect a tactical focus: “keeping growth steady.” Given the likely tradeoffs between strategy and tactics – that is, between long-term reforms and short-term growth imperatives – can Chinese policymakers really accomplish all of their objectives?

Of course, such tradeoffs have long been evident in most economies – developed and developing alike. What has separated China from the pack has been its strong inclination to place greater emphasis on strategic objectives in charting its economic-development path.

Even so, new tensions between the Third Plenum’s policies and those of the latest Work Conference have raised the question of tradeoffs once again. The consumer- and services-led rebalancing initially proposed in the 12th Five-Year Plan and endorsed by the recently concluded Third Plenum implies slower GDP growth than the 10% average annual rate recorded from 1980 to 2010.

Yet slower growth need not be a bad thing. Employment in Chinese services is about 30% higher per unit of output than in the manufacturing and construction sectors, which means that an increasingly services-led China can accomplish its critical labor-absorption objectives – namely, rapid job creation and poverty reduction – with 7-8% annual growth.

For China, rebalancing and slower growth go hand in hand – and yield the additional benefits of less intensive resource demand, a more subdued rise in energy consumption, and related progress in addressing environmental pollution and income inequality. But the recent Work Conference failed to consider China’s growth slowdown in this strategic context, placing considerable weight instead on the macro-stabilization imperatives of “proactive fiscal and prudent monetary policies.”

Since the Work Conference was concluded, investors have been debating the 2014 growth target. Will the 7.5% objective set for 2013 be maintained next year, as a recent leak from senior Chinese officials seems to indicate, or do the recent pronouncements indicate further deceleration toward 7%?

The answer will be revealed at the National People’s Congress in March. But focusing on a near-term growth target, and fine-tuning fiscal and monetary policies in order to achieve it – to say nothing of yet another credit crunch roiling Chinese short-term funding markets – detract from the emphasis on strategic shifts that economic rebalancing now requires.

Indeed, most of the six major economic tasks for 2014 set by the recent Work Conference – including efforts aimed at ensuring food security, containing local-government debt, and improving coordination of regional development – have little or nothing to do with China’s strategic rebalancing imperatives. Though laudable, they seem disconnected from pro-consumption restructuring.

In fact, only two of the six major economic tasks identified by the Work Conference fit neatly with the Third Plenum’s strategic agenda. The call for enhanced social security is consistent with the Third Plenum’s proposal to allocate 30% of state-owned enterprises’ profits to fund safety-net programs such as pensions and health care. Likewise, the emphasis on markets’ “decisive role” in upgrading China’s industrial structure and eliminating excess capacity is compatible with the Third Plenum’s goal of achieving a market-based shift to a consumer society.

But what emerges from all of this is yet another example of the timeworn “kitchen sink” approach to Chinese economic policymaking – countless proposals, initiatives, and goals that are loosely connected at best, and that are often plagued by internal inconsistencies. A new approach is needed, and it will require three key changes to China’s economic-policy framework.

First, in keeping with global best practice, Chinese authorities need to be far more explicit (that is, transparent) in prioritizing, or ranking, their policy objectives. Setting different agendas on multiple platforms – Five-Year Plans, Third Plenums, and Work Conferences – is a recipe for confusion and potential conflict.

Second, economy-wide growth targets should be downplayed. Such targets smack of the legacy of a state-directed economy – a legacy that runs counter to policymakers’ new emphasis on the “decisive role” of markets.

Finally, there is a need to separate stabilization objectives from strategic imperatives. The former should be handled by an independent central bank with primary responsibility for monetary and currency policies, whereas the latter should be the responsibility of the new Central Leading Group on Reforms, which has just been established by the Third Plenum.

Chinese policymakers’ traditional emphasis on long-term strategy has enabled them to steer past the inevitable bumps on the road to economic development. Now, however, as the authorities set out on a new course aimed at sustaining China’s extraordinary progress, they should act quickly to achieve greater coherence in their policy agenda.

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666's picture

Next you'll tell me the Chinese authorities lie like the USSA's. G'wan, pull my other leg.

knukles's picture

Whom knows?  I can't understand anything they say.  Sounds like gibberish.

Apostate2's picture


Try this one on for size: Xi Jinping’s"the theory of the two cannot negates" (liangge buneng fouding).

Having a laugh—it’s all about the Party.

Happy New Year

Thomas's picture

That is an abrupt turn for Roach, who has been a China bull all along.

Apostate2's picture

I think the author is reflecting on the cog dis reflected in policy when factions in the Party have very different (economic reform) dreams but sleep in the same bed (need for societal stability). Remember the SOE’s will not readily give up their power and their numbers have actually increased rather than declined. Thus the crack down on forbidden topics (called ‘zones’) and the rewriting of history redux.  

lewy14's picture

@Thomas - yeah, I caught that too.

Have you read Gavyn Davies' blog post at the FT?

China's fate seems to rest on its ability to pull off a "beautiful deleveraging" as Ray Dalio would put it.

How do you say "good luck with that" in Manderin?

Zero Hung's picture

Policy incoherence? The new  mobile translation software available makes everything they say a real i-opener.


JamesBond's picture

ok -  there are no disputed islands and all chinese love hello kitty




shovelhead's picture

One reviewer claimed it wasn't powerful enough and the ears hurt.

I suggested a Briggs & Stratton 5HP. unit.

The wife says "Nothing runs like a Deere."

Yen Cross's picture

 I've literally watched TRILLIONS of $'s converted to £ and € over the last year, as China and Hong Kong  PMI's and CPI's have held and strengthened.

 Something scary is about to happen, and it's credit event related.  If you really want some risk! Hypothetically good risk, without going DARK!  

  Short £ € in the first half of 2014. Long sgy and aud,(not so much nz$) for the retrace off the June/July lows. Bitchez

  Once those objectives are reached, the weekly charts become neutral, and we set new parameters<>

disabledvet's picture

my theory is that this is all about the yuan/dollar exchange rate and pricing out physical goods and DEEP inland transportation. New Orleans is the Shanghai of the West with toe ports of Antwerp, Amsterdam and Hamburg as the European equivalents. This is all about moving goods in bulk. If I were to pick a player it would be Fluor/Daniel which specializes in these types of large concrete and rebar type projects. I think the building up phase is done...time to start building out ala the USA in the 1960's.

Clowns on Acid's picture

Is the 3rd Plenium similar to the FOMC? 'Cause if its transparency that is required, Ben Shalom could give the Commies running the Pleniums plenty of advice. "CTRL P" and then wait a month... then CTRL P, wait another month...then say that policy is data dependent ... I dunno would that freak out the Int'l investors ?



besnook's picture

roach's post is incoherent. china is positioning itself to be as self sufficient and independent as possible from the west. their central bank is independent....from the west. it operates as a quasi treasury department that prints money physically and through loans. bad loans have no effect since the pboc balance sheet can theoretically be infinite and bad loans can be struck off the books without counterparty risk in their state owned industries and stimulus projects.

china is very close to the ability to thrive while the west takes a serious dive kinda like 70s japan.

Luckhasit's picture

WTF! China has a policy and it's gold by any means nessary. 

ich1baN's picture

Bud Conrad of Casey Research now is a believer that Gold is manipulated by China and JPM....

You can thank the Chinese for the smackdowns too. It's not just the US.  Start at about the 8.55 mark.

Big Johnson's picture

Thought This guy was all in with China.....

ich1baN's picture

Sometimes people grow wiser.

U4 eee aaa's picture

How is China doing regarding the modernization of its farms. They have the resources to becomes the next breadbasket to the world. There is nothing more important than growing your own food. No one can take that away from you

22winmag's picture

Don't give those red commie cuthroats any ideas.

U4 eee aaa's picture

Don't worry, no one ever listens to me (and usually that is a wise move)

disabledvet's picture

Plan "Hong Kong stage of development" (open up to world, celebrate "worldliness" at the Olympics...gotta admit that was a great Olypmics btw) to now "The Shangai Stage" (both literally and figuratively.) This is developing China internally...opening up through the Yankstze all the goods and services that can be moved through the Chinese "Mississippi" and vice versa simply repeated the same model with Hong Kong as New York approach last time. This will be all about the goods as the "gold" instead of financial products and services and the far more capital intensive "internal developments" necessary to create a productive consumer class. Again...we're talking truly massive amounts of debt creation...but this time it's all about well run "local Government largesse" as ports, highways, factories, malls...all are to be connected by a massive waterway with the "spread" (suburbs, large farms) being the main private sector build out. To execute on this plan they will simultaneously invest in the other two internally developed "waterway people" in the form of Germany and the USA and vice versa. to the extent both succeed both are rewarded. the fly in your oatmeal are called "navies" however...and Northeast Asia. the only river up that way is the Yalu...and that's there to keep the "fer'ners out." anything aggressive vis a vis the Russian/North Korean/Japanese axis is a Debbie downer.

Van Halen's picture

"Can Chinese policymakers really accomplish all of their objectives?"

Of course! As long as there are corrupt American politicians, media executives, CEOs, bankers, and military high-ups to see that Chinese goals are reached. I see a growing, thriving, increasing-in-everything China over the next five years minimum.

Stuck on Zero's picture

The Chinese government sounds like my old boss: "Focus on everything."


q99x2's picture

If the Chinese can get Krugman to stop going down in Bernanke's bunker all will be well.