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Looking ahead in China's slowing economy

By Zhang Lijuan: 0 Comment(s)Print E-mail China.org.cn, March 16, 2012

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I drink your milkshake [By Jiao Haiyang/China.org.cn]

The decision to slow down economic growth by the Chinese government caused worldwide concerns. It seems when China gets a cold, the world sneezes. The key is finding how the slowdown will affect China and the rest of the world.

China, in all respects, is a unique country. Its 30 years of economic reform has created a new model of growth, although it may not be applicable for any other developing nations.

After a period of pragmatic review of China's growth, its top leaders have decided to re-evaluate the growth model and to focus more on improving its people's livelihood. Indeed, from the Chinese central government to the general public, it has long been understood that China's current economic system is neither sustainable nor healthy. Some scholars argue that China will surpass the U.S. as the world's superpower, but most other Chinese are rather sapient in the country's outlook.

"Made in China" for years had been the tagline of the engine driving for China's economic growth – cheap labor and environmental sacrifices. Now, the era of its low cost manpower is coming to an end. Employers in "Made-in-China" factories have been suffering from labor shortage since 2008, and environmental agencies are ramping up efforts to control pollutants in water and on land. To this end, a slowing down of its economy is a good sign. However, it is questionable as to whether an economic slowdown will restore an already devastated environment. Furthermore, to what extent can the Chinese government effectively address such issues at both the local and provincial levels?

Externally, because China is losing its advantages in low cost labor, Chinese exports are facing extreme difficulties in shrinking overseas markets. Internally, exporters are having a hard time in getting financial support from state-owned banks. In the latest economic reports, China's exports have declined dramatically in the first two months of the year, resulting in its first trade deficit in a decade. Its trade balance will risk further slide for the rest of this year. Having long relied on its exports, China is more sensitive than ever to external demands – particularly the economic recoveries in the U.S. and the EU.

For a fairly long time, China has been cash-rich with sufficient capital and investment. With US$3.2 trillion in foreign reserves, the Chinese government could invest generously in just about any projects it desires as part of any foreseeable stimulus plan. Unfortunately, China's apparent wealth is only skin-deep, which can be exposed by mismanagements of its assets.

Take railroads as an example. To stimulate the economy, the Chinese government invested hundreds of billions of RMB in high-speed railways. However, financial operators overestimated Chinese citizens' spending abilities in pricing the tickets, and traveler volume on high-speed railways has been far below capacity.

In comparison with other countries, the Chinese government has been granted almost unlimited spending power, but taxpayers have little say as to how the government spends their tax money. Nevertheless, with regard to the role of government in the economy, the huge capacity of government investments has been seen as the workhorse of Chinese economic stimulus strategy.

It is time for a change. China needs to transfer its economy from one of government investment to one of domestic consumption. Hopefully, a lower targeted economic growth will allow local governments to work more efficiently on supporting social welfare, such as assisting low-earning families and individuals.

Promoting growth in rural regions is another key to China's continued success. China has a long history of prejudice against rural life and farmers. With urbanization as part of its development strategy, China is becoming more urban and less agricultural. China's agriculture has been left far behind in its efforts to globalize its economy, and the cost of this omission may be much higher than the government has anticipated. China's soybean and corn supplies now rely heavily on imports from the U.S. It is hard to imagine a nation with such a huge population having to survive with such a high dependency on imported food and grain.

Moreover, China's key trading partners do not favor China's growing stature. Earlier this week, U.S. President Barack Obama vowed to move strongly against China on "rare earth materials." At this particular time ahead of its presidential election, other U.S. politicians would also be more than happy to hammer China down on any issues involving American voters' interests. There will no winners in a bilateral trade war. When China's growth slows, the U.S. will suffer more than its politicians could expect.

It is a tough time for China. The slowdown signals challenges ahead for the country as well as the rest of the world.

The author is a columnist with China.org.cn. For more information please visit: http://www.china.org.cn/opinion/zhanglijuan.htm

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