Chinese Premier highlights structural optimization to boost growth

BEIJING, March 5 -- Chinese Premier Li Keqiang on Thursday reiterated the new leadership's vision for a more healthy and effective economy that is powered more by consumption and the service sector instead of the traditional engines of manufacturing and investment.

Addressing the opening of the annual session of the National People's Congress, China's top legislature, Li said the 2015 is a critical year for ensuring steady growth and making structural adjustments.

"China's economic development has entered a new normal... Systemic, institutional, and structural problems have become 'tigers in the road' holding up development," Li said.

The Chinese economy grew 7.4 percent in 2014, the weakest annual expansion in 24 years. The government has further lowered this year's growth target to approximately 7 percent.

The government this year will actively adapt to and guide the "new normal" in China's economic development, ensure that the economy performs within an appropriate range, focus on strengthening the quality and benefits of economic development, and give greater priority to transforming the growth model and making structural adjustments, Li said.

Chinese authorities have for years vowed to change the country's economic structure, which was long led by exports and massive state-directed investments, into one more responsive to the growing needs of a consumer-driven society.

Consumption contributed 51.2 percent of economic growth in 2014,according to the government. That compares with nearly 70 percent in the United States.

The drive has come with extra urgency since last year in the face of mounting downward pressure on the world's second largest economy. The government had aimed for a 7.5-percent expansion of the economy in 2014, but actual growth came in at 7.4 percent.

As resource-related and environmental constraints grow and costs for labor and other factors of production rise, a model of development that draws on high levels of investment and energy consumption and is heavily driven by quantitative expansion becomes difficult to sustain, Li said.

"With downward pressure on China's economy building and deep-seated problems in development surfacing, the difficulties we are to encounter in the year ahead may be even more formidable than those of last year," he said.

A slew of disappointing data at the start of the year drew a gloomy picture.he official factory activity purchasing manager's index (PMI) slumped below the boom-bust line for the first time in more than two years, while inflation dropped to a 5-year low and trade sank beyond expectations. Exports fell by 3.2 percent and imports plunged 19.7 percent for January.

Despite multiple analysis saying January's figures were incomplete because of the base effect of the Lunar New Year, which fell on Feb. 19 this year, considerable concerns remained.

The Chinese leadership has pinned much hope on more decisive reforms to overhaul China's economy and kick its addiction to rapid, investment and credit-fuelled growth.

The government's plans call for encouraging consumer spending and service businesses such as tourism, which are cleaner and could create more jobs than investment-intensive steel production and other heavy industry.

"We need to ensure every drop of spending builds to create a mighty river, so that the potential contained in an ocean of private consumers will be channeled into a powerful force driving economic growth," Li said.

Moreover, the government encourage emerging industries and new types of businesses, by raising more funds for promoting business development and innovation in addition to the 40 billion yuan government fund already in place.

It also plans to increase effective investment in public goods. In particular, the government will invest over 800 billion yuan in railway construction this year. Investment in the major water conservancy projects under construction will also exceed 800 billion yuan.

Ongoing land and residence registration reforms could also help boost China's urban population and allow its transition to a services- and consumption-driven economy.

Past measures are already paying off.

The National Bureau of Statistics (NBS) said in a statement earlier this year that the country's service sector represented 48.2 percent of China's gross domestic output (GDP) in 2014, up 1.3 percentage points from a year earlier.

The share of the industrial sector was 42.6 percent of GDP, while the agricultural sector accounted for 9.2 percent, the NBS said.

The contribution of final consumption to GDP growth is also 3 percentage points higher from a year earlier.

"We are already beginning to see the light at the end of the tunnel," said Xu Yaotong, a professor with the Chinese Academy of Governance when commenting on the figures.

Describing the current transition as a "painful" process, Xu said efforts must be made to eliminate outdated overcapacity while cultivating healthy development of emerging industries.

His words were echoed by Lu Feng, a professor with the Beijing University's National School of Development.

"Optimization of China's economic structure will become the country's 'new normal'," he said.