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At a development crossroads

By Yu Yongding (China Daily)

08:05, August 07, 2012

Economic slowdown has given China the chance to choose between high GDP growth and faster structural adjustment

China's annual GDP growth slowed to 7.6 percent in the second quarter of 2012, down from 8.1 percent in the first quarter and the lowest growth rate since the second quarter of 2009.

The newly released growth data may have dispelled fears of a hard landing for China, but have nonetheless prompted many to argue that China must stimulate its economy further to guarantee 8 percent annual growth.

Since early 2010, in order to contain inflation and property bubbles, the Chinese government has tightened monetary policy. As a result, inflation fell in June to 2.2 percent, a 29-month low, and house prices, for which the National Bureau of Statistics unfortunately has stopped issuing official data, seem to be stabilizing, and may even have fallen, albeit modestly.

The slowdown in China's growth rate is, to a certain extent, a reflection of the success of the government's effort to rein in the real estate bubble, as well as of other official policies aimed at rebalancing the economy. The growth rate of investment in real estate development, which directly accounts for more than 10 percent of GDP, plummeted by 16.3 percentage points year-on-year in the first half of 2012. That led to an investment slowdown in many related industries, such as construction materials, furniture and appliances, causing annual growth in fixed-asset investment to fall from 25.6 percent to 20.4 percent.

The trend for household consumption is less clear. But many economists have found evidence that growth in household consumption in the first half of 2012 was stronger than official statistics have shown.

The slowdown of the economy in 2012 should have been anticipated in 2011 by the government. In early 2012, in his speech to the annual National People's Congress, Premier Wen Jiabao, explaining why the government's indicative target for economic growth in 2012 was 7.5 percent, pointed out that the purpose was "to guide people in all sectors to focus their work on accelerating the transformation of the pattern of economic development and making economic development more sustainable and efficient".

In fact, to create adequate space for changing the GDP-centered growth pattern, China's 12th Five-Year Plan (2011-15) set an indicative target of 7 percent annual average GDP growth.

China's investment rate is about 50 percent of GDP, while real estate investment accounts for more than 10 percent of GDP. Given the prevalence of repetitive constructions and ubiquitous waste, investment efficiency is deteriorating quickly. With an annual growth rate of 10 percent, an investment rate of 50 percent implies a capital output ratio of five, which is unusually high relative to other countries.

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