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Home >> Business
UPDATED: 19:29, December 13, 2006
Quality not quantity for the Chinese economy (2)
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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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