Problems in macro-economy
Reflection on our economic development strategy is needed for the country's steady and healthy growth, says a signed article in the Oriental Morning Post. An excerpt follows:
China's economic growth exceeded expectation in the first half of the year. An excessive trade surplus, the oversupply of money and the rebounding of fixed asset investments have reflected problems in our macro-economic control. It is important to analyze these problems for the steady and healthy development of the economy.
Three major problems exist within the current macro-economy.
First, the risk of a suspension in the export-investment circle is increasing. China's economic development overly relies on foreign demands. Not only is there a huge trade surplus, but investment in trade industries is also increasing. Each facilitates the development of the other. If the world economy maintains its rapid growth, and the increase of domestic productivity exceeds production costs, such a cycle will be fine. But as the development of the world economy slows, China's exports will decrease and investment will be cut. Once such a cycle is broken, China's economic growth will slide.
This year and next are likely to represent the high point of the current world economic cycle. As imbalance intensifies and countries tighten their policies, the world economy may move downward after 2007. This may increase the risks of a suspension in the export-investment cycle. The Chinese economy may be hugely affected.
Second, the domestic economic structure remains unbalanced. China's trade surplus increases largely because domestic savings and government tax revenues are also increasing. High savings rates originate from low consumption. And the root of that is in the distribution of national income. The proportion of enterprise profits and government tax revenues are too high and the proportion of residents' incomes is low. Government expenditure on public products are low so residents must compensate with individual consumption. This greatly affects residents' consumption inclination.
Therefore the key to solve this imbalance is to boost domestic demand and increase the consumption rate. A practical method is to raise government investment in social causes, public facilities and social securities, which will reduce net exports and increase the residents' consumption tendencies in the short term.
Third, the economic development strategy is distorted. Economic construction has been distorted by taking GDP growth as the central indicator of success. The strategy of giving priority to efficiency with due consideration to fairness has been distorted. The taxation system and officials' incentive mechanism have both been GDP-oriented. Some regional governments and officials try every means to control public resources for their own interests and deliberately distort the macro-control policies of the State. Those responsible for these activities should be swiftly punished to guarantee the implementation of the Central Government's macro-control measures. In the long term, the taxation system and incentive mechanism for officials should be reformed, and the economic development strategy should be reconsidered.