Jonathan Fenby: Hukou System An Entry Point In China's Next Stage Of Reforms

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In this episode of China Money Podcast, well-known British writer and China expert Jonathan Fenby gives his diagnosis of China's long-term challenges. Will the world's second largest economy go on to surpass the U.S. in a couple of decades? Or, is an apocalypse in the cards?

Listen to the podcast on our website, or read an excerpt from the audio interview.

Q: In your latest book, Tiger Head, Snake Tails, you point out that China's future dominance is far less certain than people have been led to believe. Why is that?

China has certainly achieved a lot in the past thirty years. But China is now in a stage where it must rethink its economic model. The assumption that China will continue in the rapid pace of economic growth and that it will bring in political dominance is far from established.

Its economy needs re-balancing, reshaping and remodeling. China will spend the next ten years or so on getting its economic model up and running rather than thinking about dominating the rest of the world.

Q: The Chinese government certainly understands that the model needs to be changed, but with the complicated system now China finds herself in, it seems hard to find a starting point?

The difficulties with reforms in a situation like China after all those years of growth is that everything is interconnected. If you start reform in one area, for example, if you privatize farm land, people can then build up much more efficient farms in China.

That would be good, but if you do that, the local authorities which own the farm land and rely on selling them for revenues, they will need to introduce new tax systems to give the local authorities much more power to raise taxes locally and spend it themselves. If that happens, Beijing will lose an element of control over local authorities.

If you can start in one place, I would say the one area where you could consider is the Hukou registration system. You could allow migrant workers, especially second generation migrant workers, greater rights and the possibility to buy properties in the cities.

Q: There is a consensus that the reform process in China is stalled and needs to be jump-started again. How likely do you think it can pick up speed under the next leadership?

I think it will be slow and cautious. The people who run China have adopted a consensus style of leadership management. There are so many special interests involved in any debate of change.

But what I find interesting is that when I was last in Beijing, there is this awareness on the need to have a serious debate on reform. You have senior people like Wang Yang talking openly about the need to reform. There are similar commentaries on China Daily and other state newspapers.

Q: So you are saying China is at a turning point in its economic growth model and it will have a paradigm shift from now on, what does that mean for investors who are looking to invest in China?

First, I think there should be a paradigm shift. My question is that if the consensus style of leadership can be able to make that shift or not.

As for investors, this means China, in the short term, will be a rocky place to invest with lots of uncertainties. But for foreign companies investing in China, if they got something the Chinese government or the Chinese consumers want, whether it's consumer goods or technologies, they will be welcomed.

The idea of coming to China to simply exploit cheap land, cheap labor and tax breaks, that stage is over.

Q: Lastly, what is your forecast on the Chinese economy this year at Trusted Sources?

We expect the economy to grow at 7.5 percent; inflation rate to fall below 3 percent; and exports to decline but not as fast as forecasters think they will. We think monetary easing in China will be prudent. It will be staged and slow.

We don't see a property crash in China. We expect a 10 to 15 percent decline in property prices with an upturn in the second half of the year. Overall, this will be a shift of investment away from infrastructure towards machinery and factory to improve productivity.

Q: The consensus forecast is 8.3 percent this year. Why is your forecast notably lower than others?

Because we see the declining export market having a more notable effect than others. Secondly, we see a very cautious approach toward credit easing. We see the first half of this year as a rather tight period.

People's Bank of China is adopting a cautious policy and they want to keep inflation below 3.5 percent. They don't want it to bounce up again during the leadership transition period. Lastly, monetary supply will be kept tight. They want monetary supply back to the level of before 2008.

Our Guest Today

Jonathan Fenby is co-founder and managing director of the China research team at UK-based consulting firm, Trusted Sources. He is formerly editor of the UK newspaper, The Observer, and Hong Kong-based daily, South China Morning Post. A prolific writer, he has published 12 books in the last 14 years. His latest book, Tiger Head, Snake Tails: China Today, How it Got There and Where it is Heading, analyzes China's future.

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