China's economy set for long-term growth

Updated: 2011-08-04 19:20


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BEIJING - A slew of data seems to reinforce evidence that China's economy is slowing gently, prompting some observers to predict a "turning point" in the world's second largest economy which has enjoyed nearly double-digit growth over the past three decades.

Growth in China's manufacturing activity slowed for the fourth straight month in July, as the purchasing managers' index (PMI), which previews business conditions in factories, dipped to a 29-month low at 50.7, the China Federation of Logistics and Purchasing (CFLP) said Monday.

Growth in China's gross domestic product (GDP) slowed to 9.5 percent in the three months ending in June, slightly down from the previous quarter's 9.7 percent, and the 2010 fourth quarter's 9.8 percent, the National Bureau of Statistics (NBS) said last month.

However, analysts said the GDP growth was still strong enough to ease fears of a hard landing, and the slight easing was an intended result of the country's economic restructuring which aims to shift the economy to a more balanced growth pattern from the current investment-led one.

Bolstered by continued urbanization which boost domestic consumption, China's economic boom will continue, economists told Xinhua, while calling for substantial steps to reduce the economy's excessive dependence on investment.

Growth Pattern Problems

Investment contributed to 53.2 percent of the country's GDP growth in the first half of this year, according to the NBS. A number of local officials have told Xinhua, on condition of anonymity, that investment was behind at least 70 percent of local GDP growth in western regions.

The potential financial risks of this growth pattern are huge.

China's first audit of local government debt found liabilities of about 10.7 trillion yuan (1.7 trillion U.S. dollars) at the end of last year, sounding the alarm of repayment risks, as this is equal to one fourth of the country's GDP and higher than its fiscal revenue in 2010.

Analysts have said the risks had been overstated given China's sound fiscal conditions and nearly 3.2 trillion U.S. dollars of foreign exchange reserves. Yet, investment can not keep growing at the current pace for ever, leaving a question mark as to what will take the place of investment to pump up China's economy.

Domestic consumption, represented by long lines of cars crawling along city streets and crowded shopping malls, could offer some help. But the country's social security net needs to be rebuilt to dispel consumers' worries about their healthcare and post-retirement life that have kept them from spending more.

The average saving rate for Chinese urban households has doubled in recent years, rising from 15 percent in the early 1990s to 30 percent in 2009, according to a report released by the International Monetary Fund last year.

It is also evident that exports can no longer boost the economy as before, as a rising renminbi and soaring raw material prices and labor costs make it difficult for Chinese exporters to compete like they once did.

China's exports grew 17.9 percent year on year in June after rising 19.4 percent in May, 29.9 percent in April and 35.8 percent in March, the State Administration of Customs said last month.

For the first half of this year, foreign trade contributed negative 0.7 percent to GDP growth, according to the NBS.

Urban Hopes

Some economists have pointed to relentless urbanization as a long-term source for resilient growth of China's economy.

About 170 million people have moved to Chinese cities from the country's rural areas over the last 10 years, according to the Chinese Academy of Social Sciences (CASS) last year. Over the next 20 years, some 360 million people will move from the countryside to cities in China, and that provides a powerful source for demand, before China's urbanization rate reaches the 70 percent seen in many developed countries.

In the five years from 2011 to 2015 alone, China aims to lift the proportion of urban residents of its total population from the current 49.7 percent to 51.5 percent, according to the 12th Five-Year Plan.

Li Lijuan from the rural areas near Xining, capital city of the western Qinghai Province, is just one of those waiting to become an urban dweller.

Li, who works for Qinghai YIJIA Buhala Group, the world's largest Muslim caps producer not far from downtown Xining, said she earned about 2,300 yuan per month on average, and the company paid pension and medical insurance fees for her.

After working two months in the company as an operator of a large-scale digital embroidery machine, the 20-year-old girl spent 1,200 yuan buying a touch-screen cell phone and sent her mother another 2,000 yuan to buy a washing machine.

"If everything goes well, I hope I can settle down in the downtown together with my boyfriend," she said.

Ma Hongxiong, vice general manager of YIJIA Buhala Group, said there were more than 3,000 young people like Li from the neighboring rural areas working in the company.

Wang Jun, deputy head of the consultancy and research department of the China Center for International Economic Exchanges (CCIEE), said the 360 million people expected to become city dwellers in the next two decades would serve as a strong drive for expansion in both investment and consumption.

"The urbanization process first represents a strong demand for investment in infrastructure building and basic public services," Wang said.

China is on the way to building 36 million units of affordable housing and expanding the coverage of its pension and medical insurance programs in the next five years, which will most likely be a major boon for the economy in terms of investment growth.

In the meantime, the large number of farmers who would become city dwellers should also boost domestic consumption, a more reliable and sustainable engine for growth than exports or investment, Wang said.

In China, urbanization would also help narrow the wealth gap between different people and regions, a catching-up process set to release strong potentials for growth, Wang said.

Institutional Reform

Undoubtedly urbanization provides potential for long term growth, but the key is how the potential can be fully realized.

"Only when it is accompanied by institutional reforms can long-term growth happen," said Wang, who identified changing the criterion, by which the performance of government officials are assessed, as a key.

Echoing Wang, Cheng Enfu, a senior researcher with the CASS, said, "China needs to go beyond the past economic reforms."

To guarantee its future economic growth, China must root out local government officials' blind enthusiasm for GDP growth through changing the way of assessing officials' performance, said Cheng.

According to the 12th Five-Year Plan, the performance of government officials would be evaluated by a comprehensive criterion which gives higher weight to improving people's living standards, building affordable housing, and cutting carbon emissions, among other things.

Take the northwestern Gansu Province as an example, in assessing the performance of Party and government officials in its 14 cities and prefectures, "social development index" outweighs "economic development index" by 51 to 25 percent.

Cheng also said concrete measures must be taken to destroy bottlenecks hindering growth of private businesses, and create a level playing field for them to compete with state-owned enterprises which have easier access to bank loans and are often criticized as less efficient.