Will China's economy decline? (2)

16:40, July 12, 2011      

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"Troika" pulling along China's economy is undergoing changes

Residents' income grows more slowly than the economy. Vehicle and home sales drag on consumption growth

Although there is no need to worry about the full-year economic growth, changes in the fields of investments, consumption, and exports, dubbed the "troika" pulling along China's economy, require special attention.

It is a basic feature of the Chinese economy to rely on investments for growth. The month-on-month growth rates of fixed asset investments in China have been rising slowly since the beginning of the year. However, when inflation was taken into account, the growth rate of fixed asset investments in the January-May period this year was actually lower than that of the same period of last year.

Wang said that the slowdown in investment growth was due to the credit tightening policy, higher cost of funds, real estate cooling measures and increases in business inventories, which all would be conducive to economic restructuring. Spending on water projects, high-speed railways and affordable housing projects would sustain investment growth in the second half of the year, though the nominal and real investment growth rates may both be lower than those of last year.

Since the beginning of the year, China's total retail sales of consumer goods have maintained relatively rapid growth, though at a significantly slower rate than the same period of 2009 and 2010, if inflation is taken into account. Will the growth rate of consumption continue to drop?

Wang said that increases in urban residents' income can exert a major impact on consumption growth. Urban residents' per capita disposable income grew over 7 percent in real terms in the first quarter of the year, lower than the nearly 10 percent economic growth rate in the same period. Furthermore, the slowdown in sales growth in the automotive, real estate, and other industries has also seriously affected consumption growth. The sales of household appliances as well as audio and video equipment fell nearly 9 percent in the first five months of this year from a year earlier. Meanwhile, the sales of furniture dropped 10 percent, and the sales of vehicles dropped 25 percent. They became a drag on consumption growth. In order to enhance the role of final consumption demand in boosting economic growth, China should raise the income of residents at a rate similar to the pace of economic growth, and take effective measures to increase their ability and willingness to consume.

The world economy also showed grim signs to China in the first half. Wang said that although the world economy has continued to recover, the economic growth in developed countries has slowed remarkably. The U.S. economy rose at an annualized rate of only about 2 percent in the first quarter, remarkably lower than the previous quarter. The euro zone's economy has remained weak, with sovereignty debt-distressed countries, such as Greece and Portugal, approaching zero growth. Japan's economy in the first quarter shrank by nearly 1 percent from the previous quarter or about 4 percent from the same period of last year because of earthquakes, tsunamis and nuclear radiation leak.

The weak economic growth in developed countries has posed a negative impact on China's external demand. China's exports to the United States were up 19 percent in the first five months to 118 billion U.S. dollars, and its exports to the European Union were up 18 percent during the same period to 134 billion U.S. dollars, both considerably lower than their respective growth rate for the same period of last year as well as below China's overall export growth rate during the period. The weak global economic growth will slow global trade growth and further promote various types of protectionist measures, undoubtedly increasing the difficulties in China's effort to stabilize and expand the external demand.

No fundamental changes to happen in overall economic growth trend

Size of local government financing platforms not as large as expected

Following China's economic growth slowdown, domestic and foreign scholars have successively made analyses and predictions on China's economy, forecasting either "a hard landing" or "a soft landing." Will there be fundamental changes in the factors concerning China's medium and long-term economic growth?

The "hard landing" view, put forward by U.S. economist Nouriel Roubini, has attracted more attention among various discussions. He said that given China's vast investment scale, increased investments by local governments through their financing platforms and overly rapid expansion in production capacity, China will likely suffer a hard landing once the market becomes soft.

Wang said that as the investments made by central and local governments after the international financial crisis have mainly focused on infrastructure and projects relating to public livelihood, they will not result in further overproduction, but rather improve China's medium and long-term development environment. Therefore, China will not face a "hard landing." Latest statistical data shows that the size of local government financing platforms is not as large as expected and is at relatively lower risk.

"There will be no fundamental changes in medium and long-term overall economic growth trend. Nevertheless, some conditions are changing, mainly including changes in labor demand and supply related to the aging population and adjustments to saving and investment rates as well as increasingly strict restraints on resources and environment. This will pose an impact on China's medium and long-term economic growth, which will definitely be a gradual process," Wang said.

By Zhu Jianhong from People's Daily and the article is translated by People's Daily Online
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