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Is China's growth rate overheating? Saturday, July 22,2006
BEIJING:
On July 18, the National Bureau of Statistics issued the
latest economic data for the first half of the year. According to the
statistics, China's GDP grew by 10.9 per cent, 0.9 percentage points faster than
the same period of last year. Fixed assets investment increased by 29.8%, 4.4
percentage points faster than the same period of last year. If this is true, how
are we to understand China's economic performance in the first half of the year?
What is the trend for the next half?
The reporter has invited several experts to answer these
questions. Expert: Fan Jianping (Deputy Director of the Economic Prediction
Department of the State Information Center) Yuan Gangming (Institute of Economic
Research Fellow of the Chinese Academy of Social Sciences) Li Daokui (Director
of Center for China in the World Economy of Tsinghua SEM) Wang Xiaoguang
(Director of the Macroeconomics Department of the Macroeconomics Research
Institute of the State Development and Reform Commission) Wei Jianing (Deputy
Director of the Macroeconomic Research Department under the State Council's
Development Research Center) Hua Ruxing (professor of the School of Economics
and Management of Tsinghua University)
Overheating is not great enough to slam on the brakes
Reporter: How do we assess the economic situation for the
first half of this year? Is it overheating?
Fan Jianping: For the first half of the year, the
characteristics of economic performance can be summarized in two phrases: full
speed growth, increasing month by month. The economic expansion occurred in some
areas but the general trend is good. It is not necessary for China to slam on
the brakes with all strength because the economy is not overheating to such an
extent. Fixed asset investment and export demand are the main forces in
stimulating economic growth. The illusion of bubbling demand resulting from
over-relaxed monetary liquidity is expanding. Consumption factor continues to be
marginalized. This growing pattern, in the short term, can be sustainably
maintained, but will bring about problems in the long run.
Yuan Gangming: Except for the monetary credit, all other
various indicators increased in the second quarter by exceeding the expected
security margin. In terms of these figures, the economy may have overheated.
However, if we look behind these figures, compared with 2004, the current
situation is totally different. Firstly, there is no inflation, consumer price
index is low and producer prices of industrial products have been maintained at
a low level. Secondly, a significant portion of the growth resulted from
breaking the bottleneck. Thirdly, except for the real estate there is no other
industry showing excessive growth and finally, investors did not have excessive
expectations. It is not appropriate to draw conclusions that China's economic
growth is overheating only by looking into the figures. The sustained high
growth did engender risks for overheating. China is now dancing on the blade of
its economic growth. It is standing at a marginal point. If handled properly, it
will be able to absorb its internal overheating investment and escape from
inflation disaster, thus it can simply keep on running by maintaining a growth
rate of over 10%. If handled improperly, it will probably fall into an overall
overheating. We must maintain high vigilance against such risks.
Li Daokui: Regarding China's current economic growth
structure, 40 percent or even a higher proportion of it came from investment
factors, which made the structure quite unreasonable and engendered a
considerable risk. Even in their fastest economic growth period, Japan and Korea
never had a ratio of more than 38 percent. Whether such a high proportion of
investment can be transformed into effective projects in the future is hard to
tell.
Wang Xiaoguang: Apparently the investment was overheating in
the first half of the year, which may have three negative effects. Firstly,
production capacity surplus is about to occur in two or three years. Secondly,
many low efficiency and low level enterprises can hardly stand on, which will
actually weaken the macroeconomic efficiency. Thirdly, it will cause delay in
improving China's economic growth pattern. Both internal and external causes of
accelerated economic growth.
Reporter: As a matter of fact, the government has
adopted a series of macro-control measures, so why is there continued rapid
economic growth?
Fan Jianping: From an international viewpoint, during the
first half of this year, the global economic growth exceeded everyone's
expectations. The surplus of currency flow and monetary demand become a global
phenomenon, which has created favorable environment for China's exports. With
the world economic growing, strong export demand has offset the adjustment
effect of RMB exchange rate in coping with the surplus. In the first half of
this year, although China's exports slowed down a bit, its surplus still
expanded by a large rate. Increase of demand in foreign trade had a stimulating
effect on GDP growth. From the domestic point of view, the elimination of
short-term bottlenecks has accelerated the economic growth vigorously during the
first half of the year. With the projects involving investment in electricity,
railway and coals in the past several years put into operation, the supply
shortage of coal, electricity and transport were remarkably alleviated in the
first half of year. The industrial growth, which depends on these supplies, has
directly contributed to stimulating the high economic growth. The government has
pursued a stable fiscal policy and a stable monetary policy. However, the policy
has been hampered during the implementation process. Some of the implementation
has fallen short without putting the policy into solid effect. As a result, the
banking credit growth remained high and the local government expenditure also
increased.
Wei Jianing: Regarding fixed asset investment, we cannot
attribute all the problems to the local government. From January to May, the
growth rate of central projects was 22.7 percent, 12.6 percentage points higher
than the same period last year; the growth rate of local projects was 31.3%, 2.5
percentage points higher than the same period last year. The central projects
grew quickly, which is worth mentioning.
Li Daokui: Since reform and opening up, especially in the
recent five or six years, the proportion of investment poured in without the
involvement of financial intermediation sectors out of the total fixed asset
investment growing. The share of commercial banks in the proportion of the funds
has declined. Commercial banks have gradually been marginalized, which is one of
the reasons why the monetary policy did not work. With its small proportion, the
leverage function is quite limited. This phenomenon is also directly related to
the increasing proportion of the non-state-owned economy in the national
economy.
Yuan Gangming: The growth rate of loan balance in RMB of June
is 0.73 percentage point lower than that of May, which shows that the
controlling measures have taken effect. Although the effects were not that
obvious, it was the first time for China to adjust the loan without using
administrative means in many years. I hope that the policy can continue until
the second half of the year. The government should continue using economic
instruments and allocate resources by market adjustment. There are still many
market instruments to be used and the possibility is still high. Do not use
administrative means so easily.
Reporter: Do you have any proposals for the next step?
Fan Jianping: There is no need to launch a comprehensive
adjustment now. The government should make some adjustments in time. The
pressing task is to enhance the effectiveness of regulatory policy measures and
to ensure its implementation. Otherwise, if the patients don't take their
medicine, what is the point of the constant prescriptions?
Now, some foreign countries have raised their interest rates
to control the liquidity of currency. The world economy is likely to slow down
next year. China's exports will be the first to be baffled, which will trigger a
series of effects.
Talking about this issue, many people will ask: First, with
such a high savings rate, what else can we do if not to invest? Second, with
such a high production capacity as a result of active investment, what else can
we do other than export? Indeed, a high savings rate will lead to a high
investment rate, and a high investment rate will lead to a high export rate.
This will result in a rapid economic growth. To stop this cycle, we must firstly
address China's high savings rate. We should notice that currently both
residential savings rate and government and enterprise savings rates are rising
significantly. The government and enterprises have both obtained excessive share
from macro-income distribution and then converted them into investment capacity.
Therefore, in the final analysis, this is a matter of
distribution. The fundamental way to solve the problem is to improve China's
macro-income distribution structure and increase the residential income share.
At the same time, efforts should be made to adjust the expenditure structure of
the government and enterprises. The government should increase its input in
social security and public utilities, whilst the enterprises should shoulder
their social responsibilities.
Wei Jianing: It is not a good thing to have the economy
growing all the way up. China should be determined to pursue some macroeconomic
regulation to resolve some long-term problems. We have been talking about
implementing both stable fiscal policy and stable monetary policy all the time.
But could we change the method? We should give a specific definition to "stable"
and clearly stress, (for monetary policy) to transform from a neutral monetary
policy to a contracting monetary policy; for fiscal policy, to regulate local
financing acts and allow local governments to issue bonds, so as to alleviate
the pressure on commercial banks and the government. Meanwhile, to adjust the
financial expenditure structure and enhance the input in social security,
education and medical care and to encourage residential consumption.
Hua Ruxing: The government should work hard to complete three
transformations in fiscal policies. Firstly, it needs to transform from an
expanding fiscal policy to a slightly contracting fiscal policy. Secondly, to
transform from a construction-oriented expenditure pattern to a public-oriented
expenditure pattern so as to enhance the input in social security, education and
medical care and to encourage residential consumption. Thirdly, to transform
from an urban-oriented financial service policy to a large-scale financial
policy which also serves the rural area.
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