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Home >> Business
UPDATED: 19:52, December 13, 2006
Quality not quantity for the Chinese economy
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China is ushering in a new stage of economic development, with the government listing their official priority as the quality and efficiency of economic growth.

Speaking at recent meetings, China's President Hu Jintao declared that, "China should take substantive measures to shift its focus from pursuing speed to improving the quality and efficiency of economic growth."

This message comes on the back of China's three-day Central Economic Work Conference for 2006, which came to a close in Beijing on Dec. 7, hammering out major economic strategies and policies for 2007.

According to the conference, the country's economic emphasis in 2007 is to be placed on streamlining the relationships between investment and consumption, along with domestic demands and exports. The conference outlined the primary focus for next year as being the expansion of domestic consumption.

Industry Officials stated that such a new focus, not on sizzling growth, but on the cost it incurs, fully demonstrates the Chinese authorities' resolve to make 2007 a big year in the country's pursuit of sustainable development.

Moving too fast?

China has been striving for its goal of achieving "rapid and efficient" economic development over the past decade.

Since 1990, China's economy has been expanding rapidly, averaging an annual growth rate of almost 10 percent. At the end of 2005, China overtook the United Kingdom to become the fourth largest economy in the world by nominal gross domestic product (GDP), after the United States, Japan and Germany. Over the past five years, China has contributed a yearly average of around 13 percent to the world's economic growth.

However, China has paid a price for the blind pursuit of GDP -- its high energy consumption, accompanied by high pollution, has posed a threat to its sustainable development and prompted criticism from around the world.

One of the side-effects of China's rapid rise has been the sacrifice of the environment. Huge burgeoning coal plants are being constructed around the country to feed the increased demand for energy. This is having obvious impacts upon the natural environment that President Hu is now looking to rectify.

Industry officials commented that the grave situation with regards to energy efficiency is one of the motives behind the government's recent changes, listing efficiency at the top of the economic agenda.

Ma Kai, minister in charge of the National Development and Reform Commission (NDRC), commented that, "We will continue to change the country's pattern of growth next year, by further reducing energy consumption and pollution."

Also commenting on the government's recent proposals, Zhong Wei, an economist with Beijing Normal University claimed that, in spite of the government's proposals, published data indicates great difficulty in attaining this goal.

China's economy surged by almost 11 percent in the first half of this year, the fastest growth rate in a decade. At the same time, energy consumption rose, rather than fell as expected.

The Chinese government set a goal in 2005 to reduce energy consumption by 20 percent of GDP per capita over the subsequent five years. This would translate to an annual decrease of roughly four-percent annually from 2006 to 2010.

According to the NDRC, in 2007, the Chinese government's macro-economic control will still be absolute with regards to industry sectors such as iron & steel, cement and electrolytic aluminum.

Han Yongwen, Secretary General of the NDRC, remarked, "The government's macro adjustment goal remains to be the elimination of outmoded and highly polluting enterprises, with bank loans to these kinds of producers and those sectors with overcapacities to be strictly controlled."

Investment-driven

According the State Information Center (SIC), in spite of slower but healthier industrial output growth in the third quarter of this year, China's economy remains highly investment-reliant.

In the first three quarters of 2006, China incurred a cumulative industrial output of 6.2 trillion yuan, a rise on last year of over 17 percent, 1 percent higher than the growth experienced a year ago.

When analysed in quarterly terms, immense growth was experienced during the first two quarters of this year, slowing down in the third quarter, with the growth rates of industrial output standing at 17 percent, 18 percent and 16 percent respectively.

The SIC also indicated that it regarded increased investment as the major component responsible for China's rapid industrial growth. This year, with a fixed-asset investment growth of 32 percent, industrial output growth hit 18 percent in the second quarter, almost 2 percent higher than a year ago.

In the third quarter of this year, as the state macro-economic control policies have started to take effect, fixed-asset investment growth has slowed to 24 percent with industrial output growth falling by 2 percent to 16 percent.

According to the SIC, the growth of China's heavy industry is gathering speed amid stable growth for light industry. In the first three quarters of 2006, the country's light industry realized an added value of 1.9 trillion yuan -- a fixed growth similar to that on the preceding year of almost 15 percent.

Heavy industry, however, reported an 18 percent growth on 2005, an increase of more than 1 percent over the previous period. This placed the added value for heavy industry at 4.3 trillion yuan over the first three quarters of this year.

NDRC statistics show that in the first 11 months of 2006, investment in fixed assets rose by 27 percent on the previous year, with the growth rate down by almost 5 percentage points from the first half of the year.

Newly taken loans in September, October and November also decreased by 125 billion yuan, 10 billion yuan and 32 billion yuan, respectively.

NDRC minister Ma Kai warned however, that the basis for economic development is not solid enough and the rate of GDP growth is still too fast, and the sacrifices involved are too high. As a result, the government will continue to rein in fixed-asset investment.

Balancing the trade deficit

Also a major goal made at the Central Economic Work Conference for 2006, balancing international payments is to become one of the government's top priorities.

Chinese leaders have pledged to redouble efforts in the vigorous expansion of imports and overseas investment, while maintaining rational export growth and the encouragement of foreign investment.

According to the latest Customs figures, in the first 11 months of this year, China has seen the aggregate surplus of foreign trade soar to a new high of 157 billion U.S. dollars, an increase of 66 billion dollars on last year. This exceeded the 102 billion dollar deficit accrued for the whole of 2005.

Having attracted more foreign investment than any other developing country for 15 consecutive years, China is estimated to hold about one trillion U. S. dollars in foreign exchange reserves.

This growing trade surplus has led to frequent trade frictions, while the large international payments surplus has increased the pressure for appreciation of the Chinese currency, or Renminbi. (

This growing trade surplus has led to frequent trade frictions, while the large international payments surplus has increased the pressure for appreciation of the Chinese currency, or Renminbi.

Experts say too much foreign exchange has forced the central bank to issue more Renminbi, causing excessive fluidity in the domestic financial markets. Instead, they propose that the government should focus on bringing in advanced technologies, management and foreign expertise.

According to officials however, the government will continue its strategy of "going global", by encouraging overseas investment.

According to the 2006 World Investment Report by the United Nations, China's direct overseas investment exceeded 12 billion U. S. dollars last year. The report shows that China's overseas investment only accounted for around 1 percent of the global foreign investment last year, much less than its 4 percent share of global GDP and its contribution of 7 percent of world trade.

Chen Dongqi, Vice Director of the Academy of Macroeconomic Research with the National Development and Reform Commission said, "The government should increase export tax rates on primary resources like unprocessed steel, and encourage imports of technologies and resources."

Expanding domestic demand

The growth in investments and exports and the two driving forces of China's economy are expected to slow down over the next few years.

Wang Xiaoguang, an economist with the National Development and Reform Commission is of the opinion that next year, China should expand domestic demand and stimulate consumption in order to maintain sustainable economic growth.

According to Wang, "The expected global economic slowdown next year, along with the uncertainties that it will bring, is expected to directly undermine China's export's leverage for economic growth. Therefore, China should be aware of the risk of export fluctuations."

Wang was also of the opinion that in order to stimulate growth in domestic consumption, the public's consumption expectations must change. To facilitate this change in expectations, Wang stated that the wages of those that fall under the medium and low-income brackets must rise.

In order to optimize his workers' consumption expectations, Li Huiyong, a senior analyst with the research section of Shenyin Wanguo Securities, proposed to raise the minimum salary and cut his employees' expenses in three areas pensions, education and medical care. He planned to facilitate this reduction in expenses by further curbing irregular educational charges, reforming the medical care system and improving the endowment insurance system.

Statistics show that China's final consumption expenditure in the first three quarters of this year accounted for 51 percent of its GDP, far below the 62 percent registered in the 1980s. At the same time, the general public's consumption rate dropped from 49 percent in 1991 to an all-time low of 38 percent in 2005.

Fan Jianping, Director of the Economic Forecast Dept. under the State Information Center, emphasized the role of the government in expanding domestic consumption. He has called on the government to adjust the make-up of its fiscal expenditure to facilitate increased spending on education, medical care and scientific research. This in turn would formulate a sound consumption environment and effectively reduce the need for the general public to spend so much in these areas.

"The government should control the surging housing prices through taxation, monetary, and land policies as well as administrative and legal measures if necessary," said Fan.

Eight percent still growing in 2007

Officials recently announced that China would implement prudent monetary and fiscal policies next year, in a bid to maintain fast but steady economic growth, and to co-ordinate economic and social development.

Wang said, "The Chinese government is likely to link short-term macro control measures with long-term industrial restructuring moves and make a bigger effort to change the pattern of economic growth."

"The government will continue to rein in investment in overheated sectors and channel money towards fields that concern people's livelihoods. The government will use market mechanisms, such as interest rate adjustments and deposit reserve ratios, to strengthen control measures in 2007," said Wang.

Wang believes that the government will try to reduce the widening gap between urban and rural areas by directing more investment into the countryside. However, he stated that such investment into rural areas would not increase sharply in the short term, and rural development would mainly be driven by industrialization and urbanization.

According to Zheng Xinli, a Vice Director of the Policy Research Office of the Communist Party of China (CPC) Central Committee, the Central Economic Work Conference for 2006 has tentatively set the country's 2007 economic growth rate at 8 percent.

The GDP growth for 2006 will hit almost 11 percent, and Zheng's opinion is that the actual growth rate for next year will almost certainly be higher than 8 percent.

"The Chinese government will adhere to its prudent fiscal and monetary policies in 2007 to ensure the stable growth of money supply," said Zheng.

Looking forward to 2007, Zheng noted that the general target of the government's economic strategy for next year must be to prevent the economy from enduring a 'roller-coaster' ride, and thus realize steady growth as a whole.

Source: Xinhua


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