Commentary: China: Wen Won't Slam On The Brakes

The appetite for jobs is the main reason promised economic restraint is unlikely

Every March, delegates to China's National People's Congress gather in Beijing and pretend that they are real lawmakers. In fact, the NPC is a legislature that meets for less than two weeks a year and rubber stamps decisions already made by the Communist Party. Outside observers then try to figure out which of the proceedings is just window dressing, and which represents a real policy shift.

To most outsiders, an announced amendment to the constitution providing for protection of human rights clearly falls into that window-dressing category: After all, this is still a regime that elects none of its leaders and regularly imprisons democracy advocates and other dissidents. On the economic front, though, many detected a real change when Premier Wen Jiabao declared on Mar. 5 that China would pursue a more balanced economic policy and target gross domestic product growth of just 7%, compared with the 9.1% in 2003. Look a little closer, though, and Wen's pledge of restraint may prove just as illusory as any declaration the NPC has ever produced.

That's not to say that Wen isn't eager to make his mark. Beijing wants to keep China's economy from overheating. The premier, who took office a year ago, certainly has the power to push through changes, and he is trying to set a different economic course from his predecessor, Zhu Rongji. Under Zhu and former President Jiang Zemin, China engaged in massive pump-priming in a Keynesian effort to keep the economy humming, leading to a budget deficit of $39 billion last year, or 2.9% of GDP. That created speculative bubbles in industries such as steel and real estate. Worse, most of the growth went to China's rich coastal provinces, exacerbating their inequality with the poorer interior. For Wen and his boss, President Hu Jintao, the NPC meeting represents their most public effort yet to put their own stamp on economic policy by emphasizing an even distribution of China's new riches.

But does Wen really mean it when he says he wants a sharp slowdown? Probably not, say economists in Hong Kong. Take that 7% target figure. "The government has no intention to drive growth down to 7% in 2004," wrote economist Hong Liang of Goldman Sachs Group Inc. (GS ) on Mar. 8. Rather, adds Liang, the Premier "wants to ensure that local governments will not accelerate the economy further because of a high target." Far from slowing down, growth is likely to speed up this year, to 9.5%, Liang says. Wen's real goal is to prevent the growth rate from reaching into double digits.

In practice, the government won't do much to slow the Chinese locomotive. And it's doubtful that Wen wants to. First of all, there's a big unemployment problem, with the unofficial jobless rate in the big cities around 10%, that would only get worse if growth slowed. Addressing this problem is more important to Wen & Co. than making an effort to hold growth down. "If the economy grows around 10% and the unemployment situation is not improving," says Liang, "what would happen when the economy slowed to 7%?"

Neither is curbing spending and the deficit a top priority. While Wen says he wants to limit government spending, he also proposes to spend billions to boost rural incomes and promote development in the interior. Yes, he says he wants to reduce the deficit from 2.9% to 2.5%, but the difference amounts to a rounding error in the budget.

Don't look for help in monetary policy either. In other countries, strong growth would prompt the central bank to raise interest rates. But China's leaders want to keep rates low to maintain the stability of the yuan: A rate hike would bring more money into the country and add to pressure for the yuan to appreciate. Revaluation of the yuan in turn would make exports more expensive and make it even harder for China to create the jobs it needs.

No one doubts that Wen wants reforms, especially those that will improve conditions in the interior and promote equality. "Leaders of the current government are paying more attention to the welfare of the people," writes Yiping Huang of Citigroup (C ). But those pledges to restrain growth? Pure window dressing.

By Bruce Einhorn

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