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Sustaining Economic Growth
Cover Stories Series 2012> Sustaining Economic Growth
UPDATED: June 19, 2012 NO. 25 JUNE 21, 2012
To Ensure Growth
Improving the structure needs to take priority over speed concerning China's economy
By Lan Xinzhen

GOLD FEVER: Consumers look at a gold necklace at the 2012 Beijing Gold Jewelry Festival on April 28 (XINHUA)

Wang Zhongbing, Mayor of Zhanjiang in Guangdong Province, is famous for a kiss. On May 27 Wang received approval from the National Development and Reform Commission (NDRC) for an iron and steel project in his city. The project, worth 70 billion yuan ($11.08 billion) with annual steel output of 10 million tons, will be the pillar for the city's economic growth. After getting the go-ahead, Wang emerged from the commission's main office in Beijing and began smooching the final document, the culmination of four years of hard work.

But Wang is well aware that the only reason the project was given the green light is because of the Central Government's hopes to drive economic growth via investment to alleviate the economy's current sluggish trend.

Since the first quarter of last year, China's economic growth has been experiencing a wave of torpor. The 8.1-percent GDP growth in the first quarter of this year is much lower than market expectations, causing concerns of the Central Government. Economic data in May showed that the pressure of downturn economic growth has not been alleviated.

Zhanjiang is not alone in receiving a nod from the NDRC. From January to the end of May, more than 1,200 investment projects nationwide were approved, with a total investment of 200 billion yuan ($31.65 billion).

This is actually one of the series of measures taken by the Chinese Government to stabilize economic growth.

The more, the merrier

Besides expanding investment, China has also adopted measures such as promoting consumption and relaxing monetary policy to stimulate economic growth.

A joint decision made by the Ministry of Finance (MOF), the NDRC and the Ministry of Industry and Information Technology (MIIT) said from June 2012 to May 2013 a consumption subsidy will be granted to families buying energy-saving air conditioners, flat-screen television sets, refrigerators and washing machines. The subsidies will range from 180 to 400 yuan ($28.48-$63.29) per unit.

A new round of auto subsidies is also in the works. The NDRC, MIIT and another two ministries and commissions said a fixed subsidy of 3,000 yuan ($474.68) has been offered to consumers purchasing cars with engine capacities of 1.6 liters or less and saving 20 percent of oil compared with standard autos. In 2009-10, China provided 4.97 billion yuan ($788.89 million) of subsidies for rural residents to purchase vehicles, helping drive up vehicle sales to 38.2 billion yuan ($6.04 billion).

The MOF has also arranged budgetary funds of 36.3 billion yuan ($5.74 billion) to subsidize consumption of energy-saving home appliances, high-efficiency illuminating apparatus, energy-saving vehicles and high-efficiency electric machinery, expecting to drive up consumption of 450 billion yuan ($71.2 billion).

On June 8, the People's Bank of China (PBC), the central bank, announced it would cut the benchmark interest rate by 0.25 percentage points, with an aim of increasing currency supply and creating a good financing environment for investment. This is the first interest cut in recent three years. Before that, the central bank had cut the reserve requirement ratio twice this year.

Pressure intensifies

China's current economic situation is still a concern for officials and economists. According to figures released by the China Federation of Logistics and Purchasing on June 1, the purchasing managers index stood at 50.4 percent in May, a decline of 2.9 percentage points from the previous month, indicating that economic growth is starting to slip.

Tang Jianwei, senior analyst of macroeconomics with the Bank of Communications, said synchronous slowdown of exports and investment is the major reason for sluggish Chinese economic growth.

In the first quarter this year, the United States saw 2.2-percent economic growth and a slow decline in the unemployment rate. But its overall economy still lacked a continuous and powerful driving force. In the same quarter, the euro zone was stagnant with uncertainty regarding future policies, particularly the aggravating debt crisis in Spain and an unclear political situation in Greece. The result of the Greek election on June 17 and the following situation are imposing uncertainties on the euro zone, and many countries including China are preparing for Greece to leave the euro zone. All this shows the protracted nature and complexity of the European sovereign debt crisis. The post-earthquake reconstruction has helped improve the economic growth in Japan, but it is still hard for the Japanese economy to pick up in the short term.

"Low growth rates in developed economies will inevitably greatly contract the external demand for China and amplify the adverse impact to the Chinese economy," Tang said.

According to Tang, if the sovereign debt crisis in Europe spreads to the core countries, the world economy will touch bottom once again, and China's exporters will suffer severe losses.

Shen Danyang, spokesman of the Ministry of Commerce (MOFCOM), admitted that the actual external demand is even worse than expected. Particularly, demand from the European Union, China's largest trading partner, declined seriously. Judging from Customs statistics for exports and figures for the 111th Canton Fair concluded on May 5, China still faces a severe situation of exports, and external demand is unlikely to reverse in a short time.

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