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China tackles underlying economic problems
Updated: 2004-08-03 17:17

China has realized some fundamental economic problems contributing to the ongoing overheating in certain economic sectors and has begun to take actions against them.

These issues, identified at an executive meeting of the State Council in mid-July and by renowned economists, are as follows:

-- Over-investment and low consumption rate. The deeper reason is imbalanced economic structure, characterized by over-investment in steel, cement and electrolytic aluminum versus lagging agriculture, public welfare undertakings and service industry;

-- Excessive government interference in micro-economic affairs, which often leads to irrational investment decisions; and

-- High cost and high energy consumption, or an extensive mode of production.

In contrast with fast growth of investment, the consumer market seems to lack driving power. According to the National Bureau of Statistics, the consumption rate in China stood at 55.4 percent in2003, the lowest point in 25 years.

In view of the situation, the Central Government has adopted a policy that while restricting growth of investment in overheated sectors through tightening land and credit control and capital requirement in construction projects, beefs up weak sectors in the social and economic structure.

The weak sectors identified by the state include agriculture, grain production, social undertakings, health, education, science and technology and service industry.

Chinese economists say that following the cooling down of overheated sectors, stimulating consumption has stood out as a major issue to be addressed. As one percent growth of consumption would result in 0.8 percent growth of GDP, consumption should become the fundamental driving force of economic growth in the future.

The Central Government is pushing forward work in a number of areas toward this end. These include measures to increase the income of China's 900 million farmers, which constitutes a vast market; boosting development of the tertiary industry and creating more job opportunities; and speeding up construction of the social security system.

In 2004, the state increased spending on agriculture, rural areas and farmers by 30 billion yuan (approximately US$3.61 billion) and invested 80 billion yuan (about US$9.64 billion) in 10 major construction projects in the western regions. It is also carrying out reform that reduces burden on the farmers.

Another lesson the Central Government has learnt from the overheating is that excessive government involvement in micro-economic affairs is a bad thing. Seeking to have something as accomplishments, some regional governments tend to interfere in market and business operations and make irrational investment decisions.

One example of the misuse of power is a giant iron and steel project in Changzhou, east China's Jiangsu Province. The local government overstepped their authority and approved construction of the project, which involved an estimated investment of 10.7 billion yuan (approximately US$1.29 billion).

To prevent repetitions of such cases, the Central Government has been vigorously promoting reform in the administrative system to regulate governmental acts in economic affairs.

Ongoing work in this area include regulating the government's decision making process, pushing forward reform of the financial system to ensure the normal running of state-owned commercial banks and allowing the public to play a bigger supervisory role.

China has also learned that the mode of economic growth should be altered as soon as possible. China's GDP accounted for only 5 percent of the world's total in the world, yet its coal consumption accounted for about 30 percent of the world's total; electricity consumption about 13 percent of the world's total; and consumption of steel products about 25 percent of the world's total.

The extensive mode of economic growth, featuring high input, high consumption, high emission and low efficiency, has claimed a heavy toll on China's resource environment and presented grave difficulties to sustainable economic growth.

Experts here say China needs to establish a scientific assessment system for regional governments that would gauge not only economic growth, but also social progress in respective areas. It also needs to adopt a package of economic polices to constrain energy consumption of enterprises and support the enterprises to carry out technological innovations to improve the comprehensive use of resources.

Urban investment on fixed assets jumped 42.8 percent year-on-year in the first four months of this year. Investment in iron and steel, cement and electrolytic aluminum kept at high levels, triggering tension in the supply of coal, electricity and oil and transport capacity.

Mainly through tightening land and credit control, the state has effectively reined in the fast growth of investment in fixed assets.

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