China has acted swiftly and resolutely to recover the brisk economic growth it has enjoyed in the past five years. But growth is not everything. Analysts fret that the government's spending spree may complicate the country's efforts to edge toward a consumption-driven economy. What should we do to prevent the economy from falling off a cliff and at the same time switch the mix of growth from exports and investment to consumption? Yu Yongding, Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, discussed this issue in an interview with China Securities Journal. Excerpts follow:
As the U.S. financial contagion stirs some waves in the world economic waters, China has felt the pain of the export slack. Many exporters have even been forced to cease production in case of further losses. Meanwhile, as the real estate euphoria evaporates, a string of upstream sectors, such as iron and steel, electricity and coal, also have been left in the doldrums. In the face of dim prospects, the enterprises in those sectors have held back their investments, further crimping the economy.
But the seeds of today's misery, in fact, had been sowed years ago. The country had adopted tightening monetary instruments from 2004 to calm down the overheating economy. The tightening hand eased as of the second half of 2005 when the economy showed signs of contraction. Ever since then, the economy had been on bullish runs and reached a peak around 2006, leading to industrial overcapacity and frothy asset prices.
As a result, the current slowdown is owed in large part to the country's traditional growth model that was over-dependent on exports and investments.
The external conditions for China may become worse if the United States is stuck in a protracted recession. Vigorous efforts therefore would be needed to hold economic growth well above 8 percent, but not necessarily the staggering 12 percent that had exceeded the capacity that the country could bear. A growth rate between 8 and 9 percent would be a rational one, and it would be of no gain to pursue overly-fast growth at the expense of economic structure improvement.
The export sector, currently on a downward trend, calls for more stabilizing efforts. But more importantly, we should seek to relieve the country's reliance on exports to maintain growth. In addition, we are not supposed to depreciate the yuan to make our exports more competitive as otherwise trade friction and protectionism would rear their ugly heads.
The weight of real estate investments in the GDP also should be kept under control. Real estate investments have accounted for roughly 10 percent of the country's GDP, far surpassing the percentage of GDP that those investments comprise in developed countries.
The government's 4-trillion-yuan ($586 billion) fiscal stimulus package is expected to play an effective role in moderating the economic slowdown. But during the implementation process we should keep the imbalance of the growth structure from further worsening.