TO ENSURE GROWTH

By Lan Xinzhen

TO ENSURE GROWTH

By Lan Xinzhen

Improving the structure needs to take priority over speed concerning China’s economy

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 frst quarter of last year, China’s economic growth has been experiencing a wave of torpor. The 8.1-percent GDP growth in the frst 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, fat-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 fxed 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-effciency 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 fnancing 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 offcials 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 frst 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.

Mei Xinyu, a researcher at the Chinese Academy of International Trade and Economic Cooperation, said under the present international economic situation, it is unrealistic for the external demand to resume the level before the European debt crisis.

PURCHASE INCENTIVE: A Tibetan couple choose a car in Lhasa, capital of Tibet Autonomous Region

There are also major uncertainties in emerging markets. For instance, India has been faced with trade deficits and depreciation of the rupee, which intensifes exchange risks for investors. Russia and Brazil face similar risks. China’s other important trading partner Japan is playing a limited role in promoting China’s external demand.

When exports are weakening, investment also encumbers the speed of economic growth. According to the National Bureau of Statistics, in the frst four months, China’s fixed asset investment grew by only 20.2 percent, the lowest since 2003. In the January-May period, the growth rate even fell below 20 percent, a threshold of “appropriate growth of investment.”

At present, growth of China’s real estate investment is dropping signifcantly because of strict control policies, sluggish real estate sales and restricted sources of development loans. Meanwhile, manufacturing investment is declining for the influence of the weak international economy and lowering real estate investment and corporate proftability. Therefore the market expects that investment growth will continue to decline. Since reaching the height of 25.8 percent in May 2011, growth of fxed asset investment has been declining.

Among the troika driving up economic growth, only consumption is stable. In May, retail sale of consumer goods grew 0.84 percent month on month.

Zhang Liqun, a researcher at the Department of Macroeconomic Research of the Development Research Center of the State Council, said attention should be paid to a significant slowdown of economic growth, because this will cause increasing unemployment, decreasing urban and rural resident incomes and declining taxation revenues, and business difficulty of enterprises will cause an increase of non-performing loans in commercial banks.

Guaranteeing measures

Continuous economic slowdown is the result of macro-control measures by the Chinese Government for more sustainable development, and the growth speed is still higher than the target of 7.5 percent fixed by the Chinese Government at the outset of this year. However, this continuous slowdown has still attracted the attention of the Central Government. In May, Premier Wen Jiabao stressed the importance of maintaining a steady economic growth.

The NDRC accelerated approval of industrial projects. On May 20, the commission approved more than 100 projects. Some big projects, such as the steel projects in Zhanjiang and Fangchenggang, which were previously rejected for strict control of excessive production capacity, were given new life.

The interest cut on June 8 is expected to provide more currency support to investment. Tang said the interest cut is a measure by the central bank to cope with the slowdown in economic growth and ensure steady growth.“Given present figures, GDP growth in the second quarter is likely to be lower than 8 percent. The recent government policies indicate that approval of new projects is being accelerated, but the reduction of the reserve requirement ratio shows that the economic situation is really not so good. Therefore the interest cut this time is of course favorable to the whole real economy. It is conducive to reducing financing costs of enterprises and stimulating their demand of funds,” he said.

Du Ying, NDRC Vice Minister, said at a press conference on June 1 that at present, the task of “stabilizing growth” includes four parts: continuing to implement structural tax reduction measures, maintaining a reasonable credit scale, expanding consumption and keeping a reasonable investment scale, and stabilizing exports.

When exports turn sluggish and consumption grows steadily, the speed of economic growth is decided to a large extent by that of investment growth. Zhang said in the short term, a fast way would be to launch investment projects, but in the long run, the government should rely on expanding consumption.

According to Zhang, against the backdrop of the accelerated process of China’s urbanization and industrialization, a certain investment scale is necessary. During this period, the Chinese economy cannot develop without investment. In the meantime, for the need of transforming growth pattern and economic restructuring, the government should accelerate its effort to nurture consumption.

Zhang stressed that monetary policy is important now, because it is closely related to the recovery of economic growth and the stability of demand. Control of money supply by the central bank seemed too tight last year for the purpose of coping with infation, leading to the inadequate credit supply this year and curbing economic growth to some extent.

“At present market liquidity is tight, offering inadequate support to the economic growth. When prices are almost stable, the monetary policy should give more support to economic growth,” said Wang Jun, Deputy Director of the Department of Consultancy of China Center for International Economic Exchanges. Wang predicted that the central bank may further relax monetary policy within the year.

Restructured growth

At the June 1 press conference, Du said China would not launch stimulus measures like the 4-trillion-yuan ($586 billion) package after the 2008 global fnancial turmoil.

China needs to both sustain growth and fulfill the task of economic restructuring. A research report by China International Capital Corp. Ltd. says the Chinese Government is issuing a series of macroeconomic measures, not only focusing on the short-term target of stabilizing economic growth, but also considering the long-term target of eco-nomic restructuring and transformation of the economic growth pattern. According to the report, among the projects approved by the NDRC this year, 78.8 percent will be in the public utilities industry, and 11.3 percent in information services.

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

Seeing from policies issued by various ministries and commissions to stabilize growth, whether subsidies for energy-saving air conditioners and flat-screen televisions or favored housing loans to purchase of green residential buildings, energy-saving and environment protection projects account for a large proportion.

Zhang thought during this round of measures to “stabilize growth,” private investment will play a more important role. Several ministries and commissions have issued provisions for private capital to invest in monopoly industries, with unprecedented efforts to support private investment. Many experts say China’s measures to stabilize growth will not reverse the strategic progress in transforming the growth pattern and economic restructuring, nor will they intensify the long-standing economic imbalance. The Chinese Government has set a bottom line for the measures of stabilizing growth this time: There will be no investment policies as strong as the 4-trillion-yuan stimulus package in 2008, and macro-control of the real estate industry will not be relaxed.

Public concerns

As China faces pressures of excessive capacity in its steel production, some large steel projects, such as those in Zhanjiang and Fangchenggang that have received NDRC approval, have aroused public concerns that the government is increasing investment blindly to ensure steady economic growth.

Zhang said undeniably, for the pursuit of economic growth, government-led irrational investment behavior is commonly seen. Excessive investment has led to surplus capacity in many industries and low investment returns. This has spread from traditional industries such as iron and steel and ship building to photovoltaic and some other emerging industries. Because of random investment, investment effciency has dropped rapidly in recent years, so has the quality and returns of economic growth.

“We should not make random investment now with the excuse of stabilizing growth, which will impose bigger adverse impacts to future economic development,” said Zhang.

Ba Shusong, Deputy Director of the NDRC Research Institute of Finance, said experiencing massive investment and slowed down economic development in 2008 and 2009, many industries now see a surplus capacity. Hence when making new investment, the government should avoid increasing investment in these industries to facilitate economic restructuring.

Ba thought the best way of investment is to appropriately accelerate construction of infrastructure projects, instead of putting more money into the iron and steel industry.

Zuo Xiaolei, chief consultant to the president of China Galaxy Securities Co. Ltd., said decisions of vision in both breadth and depth are needed to ensure steady growth and deal with the relationship between steady growth and economic restructuring. Otherwise, even though troubles at hand can be solved, more severe problems may be caused in the future.

According to Zuo, “stabilizing growth” is more important to stimulating economic growth, hence many suggestions carry on the ideas of rescuing the crisis, such as opinions of frequently cutting the reserve requirement ratio or relaxing the monetary policy, but inflation will then be inevitable. The Chinese economy has not yet emerged out of the haze of high infation caused by the overflow of liquidity during 2009 and 2010. If relaxing the monetary policy again, the economy would get into more unstable circumstances. Therefore the government must be prudent in relaxing its monetary policy.

Zuo thought since the Chinese economy is now in a reasonable state of macro-control instead of crisis, it is unnecessary to massively overdraw money from the central bank to stimulate economic growth.

At present the biggest problem the Chinese economy faces is the declining investment demand, mainly caused by the reduction of investment in real estate, iron and steel, cement and other industries with surplus capacity, but it is a decline of ineffective investment. It indicates that to stabilize economic growth, the government needs to create new effective investment demand, such as investments in electronics, information technology and other strategic emerging industries, as well as service industries.

lanxinzhen@bjreview.com