Thu, Sep 13, 2012 page8

• PRC economy needs restructuring

  • By Tung Chen-yuan 童振源
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  Following many public warnings by Chinese Premier Wen Jiabao (溫家寶), Chinese President Hu Jintao (胡錦濤) delivered a speech at the APEC leaders’ summit on Friday in which he warned that China’s economic development was still suffering from marked contradictions and problems such as a lack of balance, coordination and sustainability. Hu said there was still significant downward pressure on China’s economic growth, but that the government would take steps to boost domestic demand and maintain steady and robust growth, while keeping overall price levels basically stable.

  The points Hu made at the meeting can be taken as a clear reflection of the real state of China’s economy in the run-up to the Chinese Communist Party’s (CCP) 18th National Congress.

  When China’s 12th Five-Year Plan was launched last year, the Beijing government made it clear that it wanted to change the country’s economic growth model, shifting the focus away from investment and exports to make consumption and domestic demand the main driving force. To this end, China has intentionally reduced the drive to export and taken steps to cool down investment, while at the same time raising the minimum wage and setting up a social security net to expand domestic demand and consumption.

  However, the Chinese economy is still growing in a way that runs contrary to these reform goals. Last year, investment’s share of Chinese GDP reached a new high of 49.2 percent, from 47.2 percent in 2009 and 48.1 percent in 2010. In view of this, the government is making greater efforts this year to rein in investment. Growth in fixed asset investment, which has averaged 25.2 percent per year since 2003, dropped to 20.9 percent year-on-year in July this year.

  Furthermore, consumption’s share of GDP is not rising, but has instead continued to fall and may reach a new record low this year. Its share of GDP stood at a record low of 48.2 percent last year, the same as the year before. The growth rate of the total retail value of consumer goods slid from 18.4 percent in 2010 to 17.1 percent last year, and just 14.2 percent year-on-year for the first seven months of this year.

  Although China has set an average growth target rate of 7 percent for the 12th Five-Year Plan, with growth expected to reach 7.5 percent his year, the rate of expansion has been declining. It slid from 12.1 percent year-on-year for the first quarter of 2010 to 7.6 percent for the second quarter of this year.

  China’s purchasing managers’ index (PMI), a leading indicator of the strength of economic growth, has remained low since the middle of last year. The average PMI was 53.8 in 2010 and 51.4 last year, sinking further to 51 for the first seven months of this year. In November last year and August this year, the PMI sank below 50, indicating a contraction.

  Despite all this, the Chinese government still has ample policy adjustment options to stop this economic slide.

  First, over the past half year, the slowdown in China’s export growth has mainly been because of falling exports to the EU. Its exports to the US and Asia’s emerging economies have been growing at about 15 percent per year. So, as long as the European debt crisis eases, China’s export growth rate should be able to recover and that would reduce the downward pressure on its economic growth.

  Second, inflation, which was 5.4 percent last year, fell to 3 percent year-on-year for the first eight months of this year and just 2 percent last month. Money supply growth expanded 13.9 percent in July — much lower the average of 18.1 percent over the past 10 years. This shows that China still has a lot of room to adjust its monetary policy.

  Third, the growth rate for fixed asset investment has declined sharply this year. The year-on-year growth rate for the first seven months of this year was just 20.9 percent, much lower than the 24.8 percent average for the previous two years. If the economy continues to weaken, China should be able to speed up its economic growth by boosting investment.

  Finally, the registered unemployment rate in China’s cities and towns stood steady at 4.1 percent in June. With a reasonably stable urban employment situation, China should be able to withstand the pressure on employment that will come from slowing economic growth. A total of 8.12 million new jobs were created in the first seven months of this year — 390,000 more than during the same period last year. It can be deduced from this that more jobs should be created this year — compared with 11 million in 2010 and 12 million last year.

  As the CCP gears up for its 18th congress, the slowdown in economic growth is sure to be a matter of great concern for the party’s senior leaders, since maintaining growth is an essential condition for a smooth handover of power.

  However, while the CCP does feel the pressure, it has ample room for handling questions on economic restructuring, and restructuring is its principal goal in the current period.

  So the Chinese government will probably not be too aggressive in using financial and monetary policy to expand domestic demand. While maintaining growth, the authorities must also keep an eye on their strategic goal of restructuring the economy. Only by so doing can they ensure that China’s economic development can be sustained.

  Tung Chen-yuan is a professor in National Chengchi University’s Graduate Institute of Development Studies.

  Translated by Julian Clegg
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