Brookings Institution’s David Dollar says country in good position for future growth

For David Dollar, a senior fellow at the John L. Thornton China Center of the Brookings Institution, the NPC/CPPCC session is a good opportunity for China to fine-tune its policies.

Dollar said he believes China has the fiscal space to maneuver. It could spend more money and cut some taxes, both targeting consumption, to help bolster the country’s transition from an export-driven economy to a consumption-driven economy.

He said China is moving in the right direction toward a “new normal”, a term used by the government to describe its transition toward a more sustainable growth model.

“Up until now, the Chinese economy has been performing quite well, because consumption and services are holding up,” said Dollar, who was the US Treasury’s economic and financial emissary to China from 2009 to 2013 and the World Bank’s country director for China and Mongolia from 2004 to 2009.

He said the growth of consumption continues to be healthy, noting that service sectors account for more than half the economy for the first time in modern history.

“So this positive transformation is going on,” he said. “If that continues in a gradual way, that’s good for the Chinese people, and if it’s more sustainable, it will be good for the world.”

Dollar emphasized the importance for the Chinese government managing the transition well, avoiding a sharp slowdown that would also affect the world economy.

In Dollar’s view, China needs to make some important structural reforms on the road ahead, reforms that were rolled out during the Third Plenum of the 18th Central Committee of the Communist Party of China in the fall of 2013.

He cited the reform of the hukou, or household registration, system and the further opening of the service sector, which he described as one of the most closed among G20 nations.

Dollar said he believes opening up those sectors will create a new area of dynamism for the Chinese economy.

He also expressed concern over the growing corporate debt and the number of industrial companies in distress.

“It’s important to let the market operate and close down enterprises that are not viable,” he said.

While pointing out the few missteps taken by the Chinese authorities in the stock and exchange rate markets in the past year, Dollar said the most likely scenario is that the government will stabilize expectations - a reference to people’s panic over the recent depreciation of the yuan.

“There is really no justification for a lot of devaluation,” he said, citing the fact that China has an enormous trade surplus.

Dollar said he believes that in the long run the yuan will continue to appreciate, but right now there is a lot of negative sentiment and a lot of speculative capital leaving the country.

“There are some risks of disorderly devaluation”, but the most likely scenario is that expectations will stabilize, he said.

Dollar said the Chinese economy is slowing primarily because investment is slowing. “I think there was too much investment in the past, causing excess capacity in many sectors,” he said.

“So far the slowdown has been gradual, and we do not see a hard landing. And I think if the policymakers do a good job, we should not see a hard landing.”