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Hot Economic Issues 2007
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As a reform research institution based in Hainan, the China Institute for Reform and Development (CIRD) has been providing intellectual services for the Boao Forum for Asia over the past six years. These services include recommending key topics for and drafting comprehensive summary reports on its annual conferences as well as drafting minutes for its annual board meetings and annual member conferences. The following selections are CIRD opinions on this year's hot economic issues:


Yuan patience a virtue


The renminbi exchange rate has always been a sensitive issue, but judging from recent exchange rate reforms, decision makers in the Chinese government have reached consensus for reform. The general posture is that a market-oriented and more flexible exchange rate mechanism should be further improved, but since this reform covers a wide range of issues and has far-reaching influences, patience is required.


According to the established mechanisms, the renminbi exchange rate may appreciate at an annual rate of less than 5 percent during 2006-10. While reform of the renminbi exchange rate has been incorporated into the 11th Five-Year Plan (2006-10), the major problems China now faces are an excessive trade surplus and the rapid increase of foreign exchange reserves.


As regards the latter, China has to expand its money supply. The government work report delivered by Premier Wen Jiabao at the Fifth Session of the 10th National People's Congress states that "effectively addressing the problem of excess liquidity in the banking system" is among the major tasks of the Chinese government. In order to relieve excess liquidity, the central bank has increased the reserve requirement ratio twice since the beginning of the year.


The government also strengthened its efforts at reining in excess liquidity following the Spring Festival when banks rush to supply loans, hoping to control the growth of loans and fixed assets investments within reasonable limits by raising the reserve requirement ratio. In this respect, if excess liquidity is not reduced by raising the reserve requirement ratio, the renminbi will face heavier pressure to appreciate, and vice versa.


Moderate renminbi appreciation is generally beneficial to the Chinese economy. First, it helps relieve excess liquidity and pressure from overheated investments and housing price hikes. Second, if companies have expectations about a stable renminbi appreciation, although it may influence the exports of some companies, this can force them to improve internal management practices and push them to transfer price advantages into new competitive advantages, aiding the economy in the end. Third, appreciation can correct distorted exchange rates, preventing Chinese companies from producing so-called cheap products through consuming massive resources.


Moderate renminbi appreciation is beneficial to other Asian nations. It increases the competitiveness of Asian exports and, in turn, China imports more from across Asia. The renminbi, if allowed to appreciate at a moderate rate, also benefits the global economy. Moderate appreciation will not create serious economic disturbances in China and the economy will retain a steady growth rate, in essence buoying the growth of the global economy.


Financial reforms gaining pace


Financial reform has recently quickened in China, with the banking, securities and insurance sectors leading the way. The introduction of the shareholding system in state-owned commercial banks has led several state-owned commercial banks to list on overseas stock exchanges. The reform of the shareholder structure is close to completion. Other reform success has occurred within the property rights system, corporate governance and internal control mechanisms. Since the reform of the exchange rate in 2005, the renminbi exchange rate has gained flexibility. An insurance sector reform blueprint has been formulated and rapid development is expected in this arena.


The national financial work conference, occurring once every five years, was held on January 19, 2007 in Beijing. Four days later, the Political Bureau of the Central Committee of the Communist Party of China met to discuss a strategic plan for financial reform. The Chinese financial industry is at an important turning point and a crucial development stage. Momentum towards its reform is expected to continue.


In the latest government work report, Premier Wen laid out six tasks developed to accelerate financial reform in 2007. The following summarizes Premier Wen's remarks:


The first task is to deepen reform of state-owned banks. This will be led by transforming state-owned commercial banks to joint-stock companies. Shareholding systems will be introduced with the Agricultural Bank of China. Additional reforms will focus on the China Development Bank.


Second, reform of the rural banking system will accelerate. A system of rural financial organizations with a proper division of work, diversified investment and a full range of functions that provide efficient services will be established. The Agricultural Bank of China and the Agricultural Development Bank of China will serve as the backbone of rural banking. Rural credit cooperatives will be reformed and the role of the China Postal Savings Bank in serving agriculture, rural areas and farmers will be strengthened. Controls will be relaxed on the establishment of rural financial institutions, with banking functions and investment in rural financial institutions from varied sources of capital encouraged. New types of financial organizations suitable for rural areas will be explored, and efforts to innovate financial products and services will be strengthened, eliminating difficulties farmers encounter in obtaining loans.


Third, development of capital markets will be a priority. The development of a multi-level system for capital markets will be promoted, and the amount and proportion of direct financing will be increased. The development of the stock market, the accelerated development of the bond market and the active yet prudent development of the futures market will be encouraged. Basic market systems will be further strengthened, and reforms of the system for issuing stocks and bonds will continue to make it more responsive to market conditions, effectively raising the quality of listed companies and strengthening market oversight.


Fourth, reform of the insurance sector will deepen. Expanded insurance coverage and improved services will be provided by insurance companies. Their ability to handle risk will be addressed.


Fifth, the financial sector will further open to foreign competition.


Sixth, strengthening and improving financial oversight, improving mechanisms for coordinating oversight and effectively guarding against and defusing financial risks will be developed in order to maintain China's financial stability and security.


Reining in housing prices


Over the past year, rising real estate prices have been a hot topic across China. A survey conducted last year by the Social Survey Institute of China querying residents of over 16 cities found that 75.3 percent of respondents were concerned about the high cost of real estate.


While it will be difficult to reverse these trends in 2007, government intervention is attempting to control the rapid increase of housing prices.


In recent years, the government has put stabilizing housing prices at the top of its list of priorities. At the beginning of 2007, Premier Wen stressed the importance of attending to this area and reiterated that securing and improving the livelihood of the people is the basic function of the government. Hence, regulatory measures by the Central Government will be strengthened, instead of weakened, in 2007.


In his government work report, Premier Wen pointed out that the real estate industry plays a major role in developing the economy and improving the housing conditions of the people, and the government must promote the industry's sustained and sound growth.  The following summarizes Wen's remarks:


In 2007, the government will attempt rational regulation of the real estate sector. Taking into consideration the fact that China has a large population and relatively little land available for building housing, as well as the current level of its economic development, appropriate plans are needed. Environmentally friendly buildings that conserve energy and land, and development of a Chinese model for housing consumption, are important goals.


Second, the real estate industry should focus on developing affordable housing for ordinary people. The government will pay particular attention to addressing the housing problems of low-income families by increasing fiscal and tax policies supporting and setting up a sound system of low-rent housing. Improving and standardizing the system of affordable housing is important in this respect.


Third, the proper use of both government regulation and market forces to maintain a reasonable scale of real estate investment, while improving the supply of commercial housing, strengthening oversight and regulation of housing prices, preventing overheating in housing prices and keeping prices at a reasonable level, should be aimed for.


Fourth, efforts will intensify to ensure order in the real estate market, strengthen oversight over it, and uphold laws and regulations in all facets of the real estate industry, including development, sales and real estate agencies. Local governments at all levels must assume their full share of responsibility for regulation and oversight of local real estate markets.


Transforming the energy sector


In the government work report, Premier Wen stated that the country fell short of targets for cutting energy consumption by about 4 percent per unit of GDP, and by 2 percent on the total discharge of major pollutants. However, he also pointed out that meeting these two mandatory targets in the 11th Five-Year Plan is very important. The targets cannot be revised, so working resolutely to reach them is a major goal.


Since conserving energy and reducing energy consumption are so important to the transformation of economic growth patterns, the State Council has established detailed targets for every province, autonomous region and municipality. Leaders in these localities are tasked with working out objectives and plans in varying stages and creating measures for accomplishing them.


Judging from circumstances in China, it is increasingly urgent to improve the energy structure. At present, the reliance on coal as the major energy source ensures stable development of the world's most important economic system, and helps the growth of global trade. At the same time, it also leads to low efficiency of energy utilization, heavy pressure on the environment and high costs of social management. To change the structure away from using coal as the major energy source will be the only road for China to transform its economic growth pattern.


From a sustainable development point of view, gas will likely become the most important energy source, along with simultaneous development of gas, petroleum and coal resources. This could be the most ideal road for China's modernization of the energy structure.


Conservation and environmental protection keys for 2007


According to requirements stipulated in the 11th Five-Year Plan, by 2010 China must cut energy consumption by 20 percent per unit of GDP and reduce emissions of major pollutants by 10 percent. These are binding goals. However, an official from the State Environmental Protection Administration (SEPA) said that emissions of major pollutants in 2006 had increased and according to the National Development and Reform Commission (NDRC), the national goals of conserving energy and reducing energy consumption in 2006 had not been reached. Statistics showed that only such provinces or municipalities as Guangdong, Shandong, Beijing, Shanghai and Tianjin accomplished their goals last year.


Now is a crucial time for China to conserve energy, reduce energy consumption and promote the transformation of economic growth patterns through conservation of energy and reduction of consumption. President Hu Jintao stressed late last year the urgency of building an environmentally friendly, energy-conserving society and doing the utmost in conserving energy and reducing energy consumption. The NDRC released a document at the end of 2006 requiring local departments responsible for energy consumption to verify energy reports and plan for energy conservation of 1,000 enterprises within prescribed time limits.


As of January 1, 2007 they are also tasked with carrying out accession and examination of energy conservation in fixed assets investment projects. Projects that are not carried out or fail to pass examination shall not be approved and permitted for construction.


As for environmental protection, the SEPA and the People's Bank of China declared on January 9, 2007 that the incorporation of environmental protection information from enterprises will be added into the corporate credit information system as of April 1. This will require commercial banks to consider whether the enterprises abide by environmental protection laws as important grounds when considering granting loans. That is to say, enterprises that break environmental protection laws will not receive loans.


To China, the ultimate way to establish an economical and environmentally friendly society is to promote market reform and enhance scientific and technological innovation. Since property rights reform of enterprises has lagged behind, some enterprises do not care about the environmental costs and don't see the point in conserving energy and reducing energy consumption. Moreover, market reform of resource prices has also lagged behind, meaning prices do not reflect scarcity. Accelerating technological innovation can lead China out of a growth pattern that depends on exhausting resources and the environment; the sooner the better.


The growth of SMEs as an economic focal point


At present, China is witnessing rapid growth of small and medium-sized enterprises (SMEs). These are playing an active role in strengthening economic growth, expanding employment channels, opening the economic system, optimizing the ownership structure, improving industrial competitiveness and promoting urbanization and industrialization. Further, SMEs are a major force in technological innovation.


By the end of October 2006, the number of SMEs in China had reached 42 million. This accounts for 99.6 percent of the total number of enterprises in the country. SMEs contributed 58.5 percent to the county's total value of final products and services, 59 percent to the retail sales of total commodities that the country produced, 48.2 percent to taxes and 75 percent to job opportunities. At present, 65 percent of the country's invention patents and 80 percent of new products are developed by SMEs. A large number of new technologies are utilized for industrial production by SMEs. This sector is also promoting the adjustment of the economic structure, with many developing businesses in fields such as infrastructure, mechanical, electrical manufacturing and services.


Expanding consumption provides a vast market for SMEs. Improvement in policies supporting and providing a beneficial environment for SMEs is occurring. Economic globalization, innovation in science and technologies, as well as industrial restructuring worldwide, will provide ample opportunities for the development of SMEs during the coming years.


In the future, China will strive to promote the transformation of SMEs in four aspects, improving their quality and competitiveness all round: transforming from quantity-oriented to quality-oriented; transforming from extensive growth to sustainable development; transforming from sole ownership to entering into partnerships; and transforming the motive of economic benefit by focusing on both economic benefits and social responsibilities.


The Chinese Government, based on the idea of allowing market mechanisms to work, will ensure practical policies providing more effective services for SMEs. Relaxation of regulations on market access for SMEs, with principles of equal access and fair treatment, will improve the environment for business start-ups. Every effort will be made to relieve difficulties in accessing financing, and mechanisms will be established for protocols of initial investment and exit. Improvement of social services and strengthened efforts in technological innovation, as well as human resource development, will also help promote healthy development of SMEs.


Prospects for China-ASEAN relations


Since the establishment of the dialogue mechanism in 1991, China and the Association of Southeast Asian Nations (ASEAN) have carried out continuous communication and cooperation. Bilateral relations have developed into close and strategic cooperation in multiple fields. China and the ASEAN members are all developing countries. Although there are differences and competition between the two parties, they are also complementary to each other in many fields.


ASEAN is China's fifth largest trading partner, the nation's fifth largest export destination and its fourth largest import source. According to statistics from the Ministry of Commerce, since 1991, bilateral trade between China and ASEAN countries has been increasing at an average annual rate of more than 20 percent. Many ASEAN members have trade surpluses with China. In 2006, China's trade deficits with ASEAN nations totaled $18.22 billion. For example, it was $11.94 billion with the Philippines, $10.04 billion with Malaysia and $8.2 billion with Thailand.


Renminbi appreciation strengthens this trend and will bring huge opportunities to ASEAN members. ASEAN not only needs Chinese products, it also needs Chinese technologies, experience and capital. Huge potential exists in terms of bilateral cooperation. Increasingly, Chinese companies are attentive to and willing to cooperate with ASEAN members. China's three petroleum companies have established four energy development areas in the world, one of which is located in Southeast Asia with Indonesia, Malaysia and Brunei as the key areas of concentration.


At the Commemorative Summit marking the 15th Anniversary of ASEAN-China Dialogue Relations in October 2006, Premier Wen declared that China-ASEAN relations are now in their best stage of development. The average tariff between China and ASEAN will fall to 6.6 percent in 2007 and 2.4 percent in 2009. By 2010, 90 percent of the products China imports from ASEAN countries will be tariff free.


In January 2007, China and ASEAN signed a free trade area, service trade agreement. Starting from July 2007, China will further open its market in 26 fields within five service sectors: environmental protection, construction, commerce, sports and transportation. The aim of this is to expand trade exchanges between the two partners. At the same time, ASEAN will also open its markets in education, tourism, construction and finance to China, allowing ASEAN to establish sole proprietorship companies or joint ventures. Stockholding restrictions will also be reduced.


In the future, according to the Framework Agreement on Comprehensive Economic Cooperation signed in 2002, China and ASEAN will establish a Free Trade Area in 2010. This will be comprised of 1.7 billion consumers, amount to $2 trillion worth of GDP and produce $1.23 trillion worth of trade volume. This will nearly equal the level of free trade areas existing in the European Union and within North America and will be the largest free trade area composed of developing countries in the world. It is reasonable to believe that China and ASEAN will both gain in this future development, based on the friendly dialogue and close cooperation nourished over the past 17 years and based on mutual expectations toward the development of bilateral relations.  


(Beijing Review, April 19, 2007)


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