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Last Updated : Mar 15, 2016 02:13 PM IST | Source: CNBC-TV18

'China's target of growing at 6.5% ambitious yet achievable'

Markus Rodlauer, Deputy Director and Chief of Mission of China at the International Monetary Fund (IMF) and Eswar Prasad, Professor of Economics at Cornell University, explain the concerns around Chinese economy.


In its 13th five-year plan announced last week, the Chinese government laid out its priorities for the year. Prime Minister Li Keqiang gave his annual state of the nation report to the legislature that is the National People's Congress, where he said China's economy would grow by 6.5-7 percent this year and achieve an average annual growth rate of 6.5 percent from 2016 to 2020.

In addition, Li devoted a big part of his report to the potentially painful adjustments to industries that will be needed to shore up growth. Gluts of coal, steel, cement and other industrial commodities have been generating heavy pollution but immense profits at the same time. Li indicated that China would need to lay off millions of workers in failing factories and mines but the government will set aside about USD 15.3 billion to support laid off workers.

Li said, "We will focus on addressing the overcapacity in the steel, coal and other industries facing difficulties, we will address the issue of zombie enterprises proactively, yet prudently by using measures such as mergers, reorganisations, debt restructurings and bankruptcy liquidations."

However, at the end of Li's speech, the world is faced with many questions. One, can China deliver 6.5 percent growth; can China prim down its giant state-owned conglomerates of steel, coal and cement without causing huge unemployment problems; will the banking system, already faced with bad loans, be able to suffer such a write down of large firms or will China make the renminbi more market determined and still avert a sharp depreciation?

Speaking to CNBC-TV18, two of the best experts on China, Markus Rodlauer, Deputy Director and Chief of Mission of China at the International Monetary Fund (IMF) and Eswar Prasad, Professor of Economics at Cornell University, explain the concerns around the Chinese economy.

Below is the transcript of Markus Rodlauer and Eswar Prasad's interview wth Latha Venkatesh on CNBC-TV18.

Latha: Can China produce this 6.5 percent growth as promised and still bring down excess capacity in so many industries, steel, coal, cement – can they achieve both?

Rodlauer: China is in the middle of a great transmission from an economy that is powered mainly by industry, exports and investment to an economy that will be fueled by consumption and services like other modern economies. This is a difficult transition, it is bound to have bumps but we believe that China again this year will demonstrate that it can do it while still being one of the most dynamic economies in the global economy and certainly probably the economy that contributes most global growth worldwide. In a nutshell, 6.5 percent is ambitious but we do believe it can be achieved.

Q: Can China achieve growth especially at a time when it is cutting down production, this sounds like a contradiction?

Prasad: It is going to be a very difficult balancing act. Certainly there is enough momentum in the Chinese economy and certainly there are parts of the Chinese economy that could help in that balancing act but in order to accomplish both those objectives, you need to have a lot going right in the economy. You need to have a financial system that works better at allocating resources, you need to have the state enterprises getting more corporatized and behaving more like commercial enterprises.

We are a long way from all of this, so these are not necessarily inconsistent objectives but in the short run, I think it is going to be quite challenging. With the manufacturing sector slowing down as much as it has been, it is little hard for the rest of the economy, especially the services sector, to pick up all the slack. So, I think it is going to be quite challenging in the present environment especially when the external environment remains very weak to accomplish both objectives.

Q: To get you into the same conversation, the more difficult part will be perhaps cutting down zombie industries because that would create a social problem of unemployment. In your estimate, do you think China can pull that off? At the moment they have over 1 billion tonne of steel capacity for instance, they are producing only 800 million can that be cut down to perhaps say 700 million tonne of steel?

Rodlauer: This is not a problem that can be solved overnight. We have looked very carefully at Li Keqiang address to the National People\\'s Congress and what is coming out of there and I think one of the real positive things is that they are focusing on this key problem of state owned enterprises and over indebtedness and zombie companies to be frank. Frankly, their goals of reducing over capacity in those key industries by about 10-15 percent a year is tough but it is doable. It is a gradual approach that is probably somewhat stronger than it has in the past.

China does have the buffers and the resources if they deploy them well to take care of those unemployed workers that will be shed by those industries. For the actual welfare and for the growth of the Chinese economy let us not forget that these so called zombies companies are already not producing output, they are producing losses. So for the economy itself it will be a good thing if they are rationalised.

I think the government has to be focused on the social support to the workers that will be shed. The government is conscious of that. We have seen in the Budget already, an allocation of a restructuring fund. I think this is a good start. It is important that China starts with it, that it demonstrates it can restructure a couple of big conglomerates, that it can take the labour shedding, that it can take the debt reduction that comes with it and does all of this not just taking out capacity, taking out bad debts but in the process also improve very much the operating environment for other state owned enterprises, make sure that they become more efficient as Eswar Prasad has said.

So, I think it is time that they start in earnest and hopefully this year will show us they can do it.

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First Published on Mar 15, 2016 09:11 am
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