China at crossroads as world economy wobbles

October 13th, 2008 - 9:30 am ICT by IANS  

Beijing, Oct 13 (Xinhua) The global credit crisis freezing up the world’s finances may be a blessing in disguise for China as it aims to modify its economic structure after three decades of breakneck growth.With its banks shielded from the worst effects of the crisis by its capital account control, plenty of liquidity and limited exposure to sophisticated derivatives, China still faces the effects of recession on its main export markets, the United States and Europe.

“With such a high reliance on international trade, it’s impossible for China to avoid the impact of the global turbulence, so economic slowdown is inevitable,” says Tang Min, deputy secretary-general of the China Development Research Foundation, which was initiated by a policy advisory body of the Cabinet.

“However, the crisis is a timely warning that China’s growth is unsustainable in the traditional pattern, relying too much on external demand,” says Tang. “It can force us to change for the better.”

China’s economy has maintained an average annual growth of about 10 percent for 30 years since the reform and opening-up policy was adopted, compared with a mere 3.3 percent for the world economy. For the last five years, it expanded 10.6 percent each year on average. But can it continue?

Exports have been slackening since the credit crisis started last year. China grew 10.1 percent in first half of 2008, 2.5 percentage points slower than the same period last year.

“There’s little chance for a successful modernisation if China continues along the old path,” says Beijing-based economist Wang Xiaoguang. “We must change our development strategy”.

He points to its diminishing international competitive edge of the labour-intensive manufacturing industry in coastal regions, the main driver of China’s robust output growth. That was due to more expensive labour and raw materials, waning external demand and the emergence of other exporters such as Vietnam.

Resources and energy pressures and environmental costs are also hampering capital-intensive heavy industry, which had propelled the recent round of high growth in China since 2002, says Wang.

From 2002, China’s strategy of development has been too exposed to foreign investment and the property sector, making China’s own enterprises and industry less competitive and risking a failure like the 1997 southeast Asian financial crisis.

Foreign-invested companies accounted for almost 60 percent of China’s exports last year and almost 90 percent of high-tech product exports.

Wang says the booming real estate sector, the fastest growing sector in China’s fixed-asset investment since 2002, requires relatively low technology, resulting in the prosperity of energy-intensive, smokestack industries like steel and cement.

“What’s more, because it’s easy to make fast money by investing in property, this sector absorbed too much capital which could have gone to technological innovation and energy efficiency,” he says.

Senior economist Louis Kuijs of the World Bank Beijing office says strong investment and domestic financing of that investment was an outstanding feature of China’s growth, helped by facilitating fiscal policies and pro-business local governments.

Nevertheless, worsening energy shortages, pollution and labour conflicts persuaded the government that this mode of economic expansion was unsustainable, says Kuijs.

“It’s fair to say the government now thinks that it’s time to go back a bit, that it’s probably too aggressive in encouraging industry,” he says.

Another daunting challenge is the expanding rural and urban inequality. Industrial output in China surged 186 percent from 2002 to 2006, but the employment growth of industry had been only 22 percent.

The industry, capital-led kind of growth has not created as many jobs in urban areas as a different pattern could have created, says Kuijs.

This means many people have not been fully absorbed by the urban economy, he says, adding that too many people in agriculture also kept productivity low there.

Unwanted as it is, the world financial crisis provides an opportunity to accelerate China’s transition to a new growth pattern driven by domestic consumption, says Tang.

More service-oriented, domestic demand-led and labour-intensive urban growth could help make the economy less reliant on energy, challenging to the environment and unequal to urban and rural areas, Kuijs says.

Their views are shared by China’s leaders, who made domestic consumption and economic transformation priorities in their 2006-2010 plan.

The state rolled out rural and urban health protection plans and offered rural children free education to junior high school. It also set up goals of cutting energy use per unit of output by 20 percent and major pollutant emissions by 10 percent by 2010.

Kuijs has seen “impressive policy actions”, but “not yet a decisive move toward rebalancing the economy” halfway into the five-year plan.

Meeting the five-year energy efficiency target is deemed crucial to rebalance the economy, but only a quarter of the planned reduction has been completed in the past two years.

More is needed and the government could take important steps in the area of pricing energy, land and environmental impact as well as fiscal policies to move more boldly in that direction, says Kuijs.

Economist Wang Xiaoguang wants to see greater efforts to move labour-intensive, export-oriented industries from the eastern and southern coastal areas to the hinterland.

He advises restraining of property sector development, saying this could encourage investment in technological innovation and energy conservation and generate higher profits.

“Only by cooling the housing market can China unleash consumption demand as most household spending goes to home-buying,” says Wang.

Meanwhile, the government turned to the vast rural market, which has 55 percent of the nation’s consumers. A key meeting held by the Communist Party of China (CPC) Central Committee from Thursday to Sunday discussed rural land reforms in a bid to spur the rural economy and consumption to offset the world economic slowdown.

China’s gradual approach to reforms and effective incentive systems for local governments had contributed to the country’s profound economic achievements and will continue to play a role in future reforms.

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