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Reining in a Runaway Economy for People's Benefit
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While other countries are scratching their heads thinking about how to accelerate their economic growth, China is burdened with a diametrically opposite problem.


The country's gross domestic product (GDP) has grown by more than 10 percent for four consecutive years, but its structural problems are too serious to ignore.


"The Chinese economy has been driven mainly by investment and exports," Hu Shaowei, a senior economist with the State Information Center, says. Such a one-sided pattern of growth has created a spate of problems, such as environmental degradation and weak domestic consumption.


Wang Xiaolu, deputy director of Beijing-based National Economic Research Institute, says, "Such a pattern is not sustainable in the long run."


Excessive investment has brought down consumption and made the economy increasingly dependent on fund inflow. Strong exports, on the other hand, have led to a huge foreign exchange reserve, the efficient use of which remains a challenge.


The Chinese government proposes to focus on quality growth, instead of fast, unsustainable expansion to avoid drastic swings in the economy.


In his Government Work Report presented to the Fifth Session of the 10th National People's Congress (NPC) yesterday, Premier Wen Jiabao expressed concern over expanding fixed-asset investments and trade imbalance, urging that their acceleration be checked.


The government has set an economic growth target of 8 percent for this year in order to reign in the economy. Despite being non-binding, his statement is a sign of the central government's determination to rebalance the economy, analysts said. "It reflects a change in the government's attitude in that it focuses on quality," Hu says. "Quality has replaced speed as the top priority."


A big hurdle in improving the quality of economic growth is the high growth of fixed-asset investments. China's fixed-asset investment has been dynamic in recent years, rising 24 percent in 2006 over the previous year. The increase was 25.7 percent in 2005, and 26.4 percent in 2004.


In the first half of 2006, the fixed-asset growth rose by a whopping 29.8 percent in the entire country and a staggering 31.3 percent in the urban areas. And had the central government not pulled the brakes, the already overheated economy would have ended on a more scorching note last year.


Loose liquidity has fueled such growth, with financial institutions extending 3.18 trillion yuan (US$413 billion) more in loans last year. The monetary authorities raised the bank reserve requirement ratio and the interest rate to deal with excess liquidity, and the government brought large-scale investment projects under control and raised the price of land earmarked for industrial use in the second half of 2006.


The measures brought down the fixed-asset investment growth from the second half of last year.


This year, however, fixed-asset investments are not expected to slow down significantly, Hu says.


That's because "many existing investment projects will continue this year", says Chen Xingdong, deputy managing director and chief economist of BNP Paribas Peregrine Securities.


Lehman Brothers economists, too, don't see a sharp drop "given the need to improve rural infrastructure and boost economic development in the mid-western regions".


Also, the World Bank has forecast that investment will remain relatively strong, even though it's quite a challenge to jazz up rural domestic demand.


Chen Xingdong says the rate this year could be around 20 percent. "Investment will not see a fundamental change until after 2009." Hu adds that "short-term returns on investments will remain high and the market mood for investment, strong This means investment will not decelerate much".


On the foreign trade front, last year's huge surplus, of 177.5 billion yuan (US$23 billion), calls for caution and counter-measures. The Ministry of Commerce has set the target of 10 percent annual foreign trade growth by 2010. But it was 24 percent last year.


The World Bank said in a report last month that China's trade imbalance was "unlikely to shrink in the near term".


Trade policy makers have vowed to shift focus from quantity to quality in exports to meet the challenge. And analysts have said the export rebate policy could be adjusted further after the rate cut in September.


"The efforts to rebalance trade will, however, be a gradual process," Hu says, with Chen suggesting that the country should adjust its impetus-based export policies to gradually bring down its export rise if it wants to change its growth pattern. To shift the growth pattern from exports, people's livelihood and the environment, not economic growth, should be atop the must-do agenda.


As a sign of the shift, Premier Wen Jiabao emphasized the importance of people's well being in his report yesterday. Chen agreed totally with the premier, saying" "The central government must shift the attention of local policy makers from economic growth to people's livelihood and the environment."


(China Daily March 6, 2007)


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