China Talks a Good Game, but Will It Rebalance?

Commerce Secretary Gary Locke is about to be made ambassador to China, according to numerous press reports. The move is indicative of the importance placed on Chinese relations by the White House and should be seen as a promotion for Locke.

But unfortunately, for him, some are now beginning to question China’s commitment to rebalancing its economy.

“Much of the talk at the National People’s Congress is of the need to boost domestic demand," Michael Williams, senior China economist at Capital Economics, said. "But with the finance ministry projecting an even smaller budget deficit for 2011 than 2010, the government’s commitment to rebalancing the economy remains in doubt.”

While human rights and Taiwan might take up a lot of Locke’s time as ambassador to Beijing, it will be the economic relationship that is likely to define his time in the role.

The first few sessions of the China congress have focused on targets for 2011, the key being keeping inflation in check at 4 percent, Williams said.

The problem is whether Premier Wen is serious about putting into place the reforms China talked about on a recent visit to Washington, he said.

Details of China’s 5-year plan are broadly known following their distribution to members of the congress.

“A key uncertainty is how rapidly projects linked to the Plan will be brought on-stream," he said. "An early start this year would help offset the coming decline in growth of government-directed investment spending as stimulus-linked projects are completed, but this may be constrained by the government’s desire to keep credit growth and government spending growth down.”

The government budget deficit is set to drop from 2.5 percent in a move that indicates China is putting the breaks on growth, not pushing for greater domestic demand as many in America hoped, Williams said.

“This is low for a fast-growing economy with a manageable level of net government debt. Officially, the government is sticking with a 'proactive' fiscal stance. In practice, fiscal policy started this year tight and is projected to get tighter.”

Other factors are actually masking a government surplus, he said.

“This extremely conservative fiscal position is hard to square with the idea that the government is doing what it can to boost domestic demand," "Williams said.

“Other things being equal, a smaller budget deficit means a larger current account surplus. A more consistent approach to achieving balanced growth would be to allow faster currency appreciation, balancing any slowdown in exports with a more supportive fiscal stance,” he added.

Gary Locke will probably know better than many that the chances of that the Yuan being floated are low, especially if a failure to rebalance sees pressure grow from Congress to push the Chinese to do so.