China Sends Strong Signal on Economic Reforms

BEIJING—China's new leaders sent their strongest signal yet that their top economic priority is to remake the economy so it relies more on domestic demand and less on exports and investment in capital-intensive state-owned companies, even if that reduces short-term growth.

In a statement issued after the annual Central Work Economic Conference, a weekend meeting of senior officials to assess economic and international challenges, Beijing's leadership said it wanted to boost imports and speed the integration of rural migrants into cities as ways to boost domestic consumption, according to reports in China's state-owned news agency, Xinhua. China needed to show "more courage to reform," the statement said.

The conference was chaired by the incoming premier, Li Keqiang, and focused on one of Mr. Li's top economic priorities, urbanization, which the group's statement called an "historic task" and "the biggest potential driver of domestic demand." Rural migrants can earn far more money working in China's cities than they can in their home villages, giving them a lot more cash to spend.

China's State Council, the government's top body, now is looking at a land reform plan that would increase the payments to farmers whose land is seized by local governments and later used in real-estate development. Such payments would make it easier for farmers to move to China's cities. China's population became more than 50% urban last year.

The work conference set out a policy agenda, but didn't fill in specifics, such as a target for either growth or inflation in 2013. Those specifics will be revealed in March 2013 as Mr. Li formally takes his new government position and new Communist Party chief Xi Jinping becomes China's president.

The statement, though, comes on top of a recent trip Mr. Xi made to Guangdong province, across the border from Hong Kong, which recalled a 1992 swing through southern China by then paramount leader Deng Xiaoping to relaunch economic reforms that were stalled by hard-liners after the Tiananmen Square killings. The new stress on reform is bound to raise expectations that the new team will press for economic changes that Mr. Xi's and Li's predecessors talked about but failed to deliver.

The work conference was also frank about the domestic and international problems confronting China in the year ahead. "We face a number of risks and challenges," the statement said. "The problems of unbalanced and unsustainable development remain. Growth faces downward pressure. There is excess production capacity. Enterprises face rising operation costs and capacity to innovate is inadequate. There are latent risks in the financial sector."

China's economy has slowed sharply over the past seven quarters. In the third quarter of 2012, GDP rose 7.4% compared with the year-earlier period, the slowest pace of expansion since the global financial crisis of 2009. While manufacturing and housing have rebounded since then and most analysts expect the current quarter to register growth of around 8%, few expect a return to the years when China regularly registered double-digit growth.

"There's a pretty clear policy line to support growth at the level it's running at now," said Arthur Kroeber, managing director of GK Dragonomics, a Beijing market-research company.

Analysts expect China either to renew its 2012 goal of 7.5% growth for next year, or reduce it slightly. The number isn't meant as a precise forecast—China regularly tops the stated goal—but it is significant as a signal of the leadership's intentions. A relatively modest number, like 7.5%, suggests that Beijing is willing to swallow slower growth in the short term to revamp the economy so it has a stronger foundation for growth in the coming years. The statement refers to that priority as a quest for "quality" growth.

Those hoping for another burst of new loans or infrastructure investment to buoy growth in 2013 are likely to be disappointed. The statement promises an appropriate expansion in overall financing and bank loans. On investment, the emphasis is on increasing private spending, not duplicating existing public infrastructure.

China's policy makers don't want to repeat the vast stimulus spending of 2009, which helped to keep China from sinking into recession as global trade contracted. That spending plan, financed by a big increase in lending by state-owned banks, wound up inflating a property bubble, which China's leaders have spent three years trying to deflate, and producing a round of bad loans that are starting to come due. Premier Wen Jiabao, who was celebrated in 2009 for conceiving the plan, now has been criticized for overdoing it.

The statement said China would "unswervingly stick to the controls" it has imposed on property lending and other measures to keep housing prices in check.

While the work conference statement discussed increasing imports as a way "to support the country's economic restructuring and make its international payments more balanced," it didn't say how it intended to do that. One way would be to increase the value of the yuan compared with the euro and the dollar, which would make imports from China's two largest trading partners cheaper in yuan terms.

The U.S., in particular, continues to press that line in regular meetings, most recently when U.S. Treasury Undersecretary Lael Brainard flew into Beijing last week to meet with top leaders.

So far in 2012, the yuan has strengthened about 1% against the dollar and a fraction of a percent against the euro, as Chinese leaders regularly repeat that the currency is close to "equilibrium." It doesn't look like the leaders are planning much change. The statement pledged to maintain the "basic stability" of the exchange rate. China's leaders worry that a faster appreciation would further batter Chinese exporters who complain that the rise in the yuan since June 2010, when Beijing allowed it to float somewhat, has made business much tougher for them.

The statement also reiterated past comments from Beijing that it would try to lower financing costs for businesses, though it's unclear what that might mean. One possibility is a cut in interest rates, the last of which was in July 2012. Another possibility may be that Beijing is looking to substitute value-added taxes for other businesses taxes, as it has done experimentally in some cities. The effect is to reduce taxes on service businesses, which Beijing is trying to promote as part of its effort to rebalance its economy.