Tue, Feb 18, 2003 - Page 8 News List

China's economy needs fast growth to survive

By Tung Chen-Yuan 童振源

Ever since we entered the 21st century, the opinions of academics and businesspeople regarding the future of the Chinese economy have been diametrically opposed. Why do they hold such diverse opinions?

One faction led by Gordon Chang (章家敦) and Joe Studwell believes that the Chinese economy is about to collapse, and that there is cause for worry about its future. Businesspeople, however, see China as a land full of opportunity, gradually progressing towards prosperity. By the end of last year, China surpassed the US as the world's most attractive destination for investments. So is China's economy about to collapse or is it brimming with opportunity?

Overall, the Chinese economic situation is one of outward strength and domestic weakness. Its strength derives mainly from foreign capital and the increase in exports it creates. Currently, both the foreign investment and the export situation are looking quite good, seeing 23 and 19 percent growth, respectively, during the first three quarters of last year.

Domestic problems basically stem from issues created by state-owned enterprises, the financial system and agricultural reform. These include problems in national finances, social security, unemployment, deflation, income distribution and imbalances in regional development. These problems are worsening continuously.

There is thus a strong contrast between the performance of the external and domestic economies, making a correct assessment of the future of the economy next to impossible.

Let's take look at the sources of China's economic growth -- active financial policies and the contributions by foreign capital and exports. Financial policies and foreign capital (including exports by foreign-owned businesses) each contributed about 30 percent of economic growth in the late 1990s. It will probably be impossible to maintain this situation in future.

China's budget deficits have in recent years risen to the level where warning bells go off internationally -- 3 percent. Add to this other explicit and hidden debts. Chinese officials and academics are all of the opinion that these policies cannot be perpetuated.

During the 1990s, Chinese exports grew at an average annual rate of 16 percent. International markets will probably not be able to support such growth ad infinitum. Further, many foreign investors are still losing money. Inability to turn these losses into profits in future will probably affect the willingness of foreign businesses to invest.

The above assessment seems to be slightly pessimistic, but not to the point where it sees the Chinese economy collapsing. Quantitative research by many different economic models by Chinese officialdom, the World Bank, the Organization for Economic Cooperation and Development, the Asian Development Bank, Chinese academics and US investment consultancies shows that the rate of economic growth will remain between 3 percent and 8 percent between 2000 and 2020.

The main factor affecting the speed of economic growth will be whether economic reform and transformation will be successful, leading to more efficient use of economic resources and increased productivity.

This forecast, however, is purely based on economic premises and it only considers the supply side, ignoring the demand side, social stability or political variables.

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