Push and Pull:

Opposing Forces on China's Growth

By HU JIANGYUN

IN the second half of 2011, the European debt crisis spread further, sending shockwaves throughout the world and dragging down the global economic recovery.

The world is turning its gaze from the U.S. with its sluggish economic recovery and Japan with its lasting depression to emerging economies like China and Brazil. The momentum of China's economic growth will not only become the main concern of China's major trade partners, but will also be a focus of world major transnational corporations' attention. While transforming its mode of economic development, China should see an economic growth of over 8 percent next year.

Government Plans and Deep Pockets

Last year was the start of China's 12th Five-year Plan for National Economic and Social Development. In the Outline of the 12th Five-year Plan, China puts forward its primary objectives for the period of 2011-2015, including realizing steady and rapid economic development and an average annual GDP growth of 7 percent. To achieve its objectives, China will strengthen and improve its macroeconomic control, establish long-term mechanism to expand consumer demand, adjust its investment structure, push forward industrial upgrading by relying on technological innovation, and intensify its policy guidance such as promoting coordinated regional development.

In this year, China will continue to rely on investment and domestic consumption to fuel its economic growth. Transformation of the economic development mode is the main goal of the 12th Five-year Plan. This is a long-term task for it will be a comprehensive, systematic and strategic transformation in China's economic and social fields. Such a transformation will take some time to produce tangible results.

In 2008 and 2009, the Chinese government promulgated decrees on advancing reform and opening-up and economic development in the Yangtze River Delta, plans for the reform and development of the Pearl River Delta, and accelerating the construction of an economic region on the western bank of the Taiwan Strait. These three guidance documents all extended economic plans to 2020, with progressive targets set to be reached in 2012 and 2020. Large investments have been made to put these plans into action.

Meanwhile, a new wave of development is sweeping across western China, from Guangxi to Yunnan and Shaanxi to Xinjiang, and development plans for China's Central Plains area have also been introduced, including the establishment of the Wanjiang River Economic Belt in Anhui Province and the Zhongyuan Economic Zone in Henan Province. In the Northeast, development plans aiming to revitalize old industrial bases have been implemented in areas such as Liaoning Province's coastal economic belt and the Changchun-Jilin-Tumen Economic Belt in Jilin Province. Apart from these national and regional development plans, several development plans on important industries have also been released, including the Resolution of the State Council on Accelerating Cultivation and Development of Strategic Emerging Industries. The above is all evidence that a new round of investment in China has kicked off, and it's expected that China's fixed-asset investment will maintain a growth rate of 20 percent in the coming years.

China's huge domestic demand will also contribute greatly to its economic growth. In the 30-plus years since reform and opening-up was introduced, China's per capita national income has been increasing. Chinese people have gained considerable purchasing power and China has become the world's largest market. Since the global financial crisis broke out in 2008, China's enormous booming domestic market has become even more significant in comparison to the stagnant overseas market, and domestic demand has made China an important country for car production and consumption. If the government helps create a fair market environment for competition and guides industrial development and consumption, China's domestic consumption demand can be further harnessed to play a role in stimulating its economy.

An important factor in China's sizable purchasing power is its high savings rate. Currently, existing problems are holding back residents' spending. These problems lie in worries about education, health care and retirement that fuel the need for financial security and satisfactory products and services. If the government can provide public services covering social security, medical care and education to relieve people's worries about their families' futures, more personal savings will be used to boost domestic demand.

A Need for Unification and Consistency

In spite of its huge potential for consumption and existing investment projects, there are unfavorable factors influencing China's economic growth. Due to the sluggish world economy, the contribution of China's exports to its economic growth is set to decrease dramatically. While improving their competitiveness, China's businesses need to seek and explore new overseas markets.

Defects in the Chinese market system will slow its economic growth somewhat. A unified market for all administrative regions in China has not yet formed and there are barriers that stifle the flow of production factors such as workers and capital. The role of interest rates and the exchange rate in adjusting the market has not been fully tapped. Redundant administrative interventions also curb economic development.

Insufficient continuity and stability of China's policies reduce the government's ability to guide market players properly. For example, since the financial crisis, the central government loosened its monetary policy before switching to a more prudent approach, and misunderstandings emerged about the two policies. Continual adjustments to the export tax rebate rate in foreign trade policies also create uncertainty in the market that hinders growth. Many of the policies aiming to handle the repercussions of the financial crisis and plans for the adjustment and rejuvenation of selected industries are due to expire, and it is key that proper follow-up policies be introduced.

On the whole, the Chinese government has correctly analyzed domestic and international economic situations and taken measured actions to maintain stability in economic policies. This year, China's economy will continue on its upward trajectory and become an important engine for global economic recovery.

HU JIANGYUN is a researcher with the Development Research Center of the State Council.