New thoughts on the new normal

Former Australian pm praises economic reform, but does not underestimate the size of the challenge

China's widely talked of economic "new normal" is helping reshape the way the country will grow, former Australian prime minister Kevin Rudd says.

However, weak global demand may affect the country's economic transition, he says.

Rudd, a fluent Mandarin speaker, said in an interview at the World Economic Forum in Davos, Switzerland, recently that his optimism is based on two things. One is the nature of the Chinese leadership's decision to press on with economic reform, including giving the market a "decisive role".

"The second is that those who are driving these policies are highly intelligent and they know what they are doing," Rudd says.

Significant decisions have already been made, in particular those relating to financial markets and foreign investment liberalization, he says.

Decisions made in the third plenary session of the Central Committee of the Communist Party of China in 2013 were the first clear statement that the market would be regarded as decisive in determining other economic policy, he says. "That's new. Apart from this, saying the market plays a 'decisive' role is not the same as saying it plays a 'significant' role, is it? That's a fundamental philosophical shift. That's why traditional intervention by way of planning or public investment does not easily fit under the term 'new normals'.

"The reason I am quite confident this will succeed is that those driving this model of economic policy changes really know what they are doing, and they understand the political economy."

The big challenge for the country in such a transition is the weakness of global demand, he says.

"With normally strong global demand, a healthy Europe and a healthy United States buy a lot of stuff from China. But at the moment they cannot provide a continuous significant contribution to buying such exports, which would contribute to the growth of the country's GDP. But you cannot blame China for that. It is simply because the global economy is weak."

Rudd says he has closely watched China's development under Xi Jinping's leadership and has read English and Chinese versions of Xi's new collection on governing China.

Of the so-called new normal, which has been widely debated, Rudd says: "In China, the thing about old models is that they eventually need to be retired, and the feeling is that 'new models' need to replace them.

"So part of this new normal is the new model itself, and the new normal is obviously the new driver for growth being private consumption."

China's traditional growth drivers of low wages, labor-intensive manufacturing for export, and public fixed capital investment will become less decisive in the country's economic growth, he says.

One problem with the old growth model is the damage it causes to the environment, he says, and the cost is clear when you look at air and water pollution, land quality and, more broadly, climate change.

However, Rudd says that if the new model is going to encourage people to be consumers, the correct policies need to be in place for this to happen. On top of that, Chinese people need to have confidence in the country's education, health and social security systems.

Another driver for new growth is private fixed capital investment, and that can only be achieved through credit market reform, he says.

In the transition to the new model, Rudd says, the challenges for policymakers lie, in many respects, in its core components. It had previously been the practice of Chinese governments to accelerate public investment whenever growth slowed, for whatever reason, whether external or internal, he says.

"You can only do that for so long. The problem is that if you use that public investment for infrastructure, for public housing or in loose credit policy, you suffocate the emergence of new growth drivers in terms of personal consumption and in terms of private sector expansion."

The new normals will reduce dependence on what look to be easy solutions, and allow growth to slow, enabling the new growth drivers to be put in place.

"So the new normal is about the politics of this transition, and about political economy."

Rudd says a lot of policy thinking would have gone into the decisions adopted in the third plenary session. "If you read that document, it is pretty comprehensive."

He read the English and Chinese version of the document, he says.

What has impressed him most is financial sector reform and several policy measures to make capital markets more responsive to the needs of the private sector.

Rudd says that over the past year he has seen certain financial reform measures being taken.

"These have been related to progressive liberalization of interest policy in Chinese financial institutions. Once you do that, the financial institutions have to respond competitively in the market place."

Rudd says the government is being bold in not simply suffocating private consumption and the expansion of private firms with another load of fiscal stimulus.

"That's new."

The expansion of private firms since the third plenary in 2013 has been impressive because of the inherent dynamism within these firms and the need for them to play a much greater role at home to give them a bigger base so they can expand abroad, he says.

"China needs not just one Jack Ma, but thousands of Jack Mas," Rudd says, referring to the founder and chairman of Alibaba Group.

China's Silk Road initiative is about to expand connectivity, he says.

"The idea is an extension of the ASEAN idea, and I think it's a good idea to link through rail, port, digital."

The big challenge that China faces with the Silk Road initiative is communicating the idea, he says.

"When China talks about the initiative, it talks of 'one belt, one road', but that does not translate into English so readily."

An English speaker hearing that phrase is more likely to think of trousers than linking countries together, he says.

He suggests it could be called the "Pan-Asian connectivity agenda."

"So it seems that with this you have some communications challenges. But I support it, and I support the Asian Infrastructure Bank, because Asia can do infrastructure efficiently, and it needs more infrastructure."

Liu Jia contributed to the story.

fujing@chinadaily.com.cn

(China Daily Africa Weekly 02/13/2015 page32)