Analysis: Turning a super economic tanker

10:02, March 21, 2011      

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The Chinese government has lowered its economic growth target for 2011-2015 to 7 percent from 7.5 percent in the previous Five-Year Plan (2006-10), making it the country's lowest annual growth target in two decades.

The new goal comes after China's economy actually expanded at an average rate of 11.2 percent each year from 2006 to 2010. As a result, China replaced Japan last year to become the world's second-largest economy.

It is generally understood that the government's growth target will be routinely surpassed, and China's economic growth will not fall below 7 percent in the near future.

"China's economy is expected to continue to grow at a relatively fast rate for at least two or three decades due to great potential in its industrialization, urbanization and globalization," says Wang Jun, a macro-economic researcher with the China Center for International Economic Exchanges, a government think tank.

Wang says the lower target signals that the government is serious about rebalancing the economy. The 2011-2015 period may well be the time when the economy really changes from relying on exports and investment to becoming more domestically-driven, consumption-based, he says.

China's rapid economic ascent has been heavily fueled by exports and government investments in capital- and energy-intensive industries.

But the economic success comes with heavy costs: pollution and a yawning wealth gap. The mode of development is "unbalanced, uncoordinated and unsustainable," according to Premier Wen Jiabao.

The government pledges to, over the next five years, prioritize growth that is healthier, sustainable and, most important, do a better job converting big GDP gains into improved human welfare to boost domestic consumption.

China's economy has relied so heavily on trade and investment that domestic consumption only accounted for 49 percent of GDP in 2008, with household spending accounting for just 35 percent.

Household consumption accounts for around 71 percent of GDP in the United States and 57 percent in India, according to the World Bank.

No one is arguing that China can't consume more.

"China has 800 million rural citizens and their income and consumption is relatively low. There's the potential for China to increase consumption and domestic demand," said Li Deshui, former director of the National Bureau of Statistics.

China's urbanization rate is expected to increase to 51.5 percent by 2015 from the current 47.5 percent, as more rural people swarm to cities in hope of higher paid jobs and better living conditions. In 2010, China had 242 million migrant workers.

To boost worker welfare, China wants to see incomes rise as the economy expands.

Wen has said the government aims to create 45 million urban jobs over the next five years and reduce the number of people living in poverty. He said the government will make more efforts to increase incomes, raise minimum wages and basic pensions and raise the individual income tax threshold.

International experiences say that an economy is to correct itself after three decades’ avid growth. Wang Yiming, deputy head of the Academy of Macroeconomic Research under the National Development and Reform Commission, said.

"At this point, to lower the economic growth target appropriately and boost households' income for sustainable internal momentum is a must," Wang said.

However, boosting consumption is not a simple task. One current major obstacle in China is the lack of an effective social security net.

The government has vowed to increase social welfare spending, in areas like health care and social security, to release consumers' disposable income and encourage them to spend.

The government also pledges to push the economy in a new direction, away from massive investment in heavy industries and enormous but cheap labor.
Government policy makers are looking to new strategic industries to lead the transformation, promoting innovation, not sweatshops.

The draft 12th Five-Year Plan aims to develop new strategic industries, targeting their value-added output to account for 8 percent of the country's GDP by 2015.

The industries include alternative energy, bio-technology, new-generation information technology, high-end equipment manufacturing, advanced materials, alternative-fuel cars, energy-saving and environmental protection, according to the document.

The share of these sectors will be increased to 15 percent of China's GDP by 2020, according to an official document issued by the State Council, China's Cabinet, in October last year.

Shanghai Daily / Xinhua
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