Enhancing economic restructuring to rid off vicious investment circles

15:53, March 16, 2010      

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China, as a developing nation, is sure to have a strong demand for investment since it has to build all kinds of enterprises and varied sorts of infrastructure and renew or upgrade the equipment of the existing enterprises in the course of development. So, its investment radiates an upward trend from the central to local governments, and an investment boom has emerged as a matter of course.

With the shaping of an input or investment boom, credit expands fast, and inflation and overcapacity follow suit in certain sectors. So the central government has to slam emergency brakes and turn to an austerity policy. When the two "lock" gates, finance and credit, are shut, economic growth declines, unemployment increases and fiscal revenue drops accordingly. Then, local governments complain to the central government, and the latter resorts to economic stimulus moves. As this goes round and begins again, there will be an impulsive cycle of investment for China's economy.

Under the conditions with the market-oriented economy being spurred but financial regulatory setup remaining incomplete, the investment impulsive cycle of Chinese economy is often linked with the cycle of assets bubbles. This is ascribed to the low-interest rate and the extended asset-scale, which are often reflected in the assets speculation in the wake of an economic stimulus and investment expansion.

Investors, after obtaining the low-interest loans, often put a portion of their money into the stock market, property and other resources markets for transactions to get relatively greater, higher profits, so the asset bubbles would occur. The bursting of asset bubbles is however bound to implicate real economy and accelerate a vicious cycle of investment impulse problems.

To get rid of a vicious investment cycle and asset bubbles cycle, a key factor lies in an endeavor to step up the transformation of China's economy, and this is the most crucial "pre-adjustment" measure. And the restructuring of economy will help do away with the basis of investment impulsive cycle and asset bubble impulse cycle.

By the progress of economic restructuring, it is meant that the number of types and gross economic growth modes will gradually shift to the effective, intensive mode of economic growth. In this process of transforming economic growth, even if the investment still plays an important role in stimulating economic growth, but it can significantly reduce the overcapacity.

More important, in the course of economic restructuring, income distribution will be matched by changes in the domestic demand, which will be under expansion; economic growth will be adjusted or geared to the equal emphases driven by both investment and consumption, thereby cutting the rate of dependence for an economic development driven mainly by increasing input.

As a matter of fact, it is essentially an issue of economic system that lies behind the investment and assets-bubble impulse cycle. Therefore, the economic restructuring must be combined with the in-depth development of economic reform.

Then, why do local governments often strive to get projects? This is because projects facilitate the availability of financial allocation and bank credit funds. So, the investment can apparently be the main force for propelling economic growth; with more project items, there would be a greater investment boom, which will inevitably be heated up repeatedly. This is also owed chiefly to the investment initiative, which has been in the hands of governments.

Meanwhile, why is it so difficult to effect a change in the investment decision-making body? The main reason however is that the government, which has seized the power for making investment decisions, is reluctant to yield, relegate or return its investment decision making power to the market.

The market poses the dominant investment decision maker – this is not meant to say that the government will withdraw wholly from the investment decision making. Nevertheless, it still goes on making vital investment decisions on such issues as those relating to the national defense, national security and vital economic matters relating to the well-beings of people. As for any competitive industrial investment, it is would be decided by the market, and the government would no longer take the initiative in making any investment decisions.

Investors will take profit and loss responsibility with various types of enterprises or firms, which are expected to decide whether or how much investment. In this way, we can avoid the phenomenon of excess capacity (or reduce this phenomenon at least), but also can make the macro-control measures much more effective and efficient.

By People's Daily Online and contributed by Prof. Li Yining, an ace economist and vice-chairman of the Subcommittee of Economy under the National Committee of the Chinese People's Political Consultative Conference (CPPCC)

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