Changing the Economic Course

By LAN XINZHEN

Changing the Economic Course

By LAN XINZHEN

The Chinese economy sw itches gears as it shifts from an export-oriented to a consumption-driven grow th pattern

T he Chinese economy grew a robust 9.6 percent in the third quarter of this year, maintaining its sound momentum even though the quarterly grow th rate was 0.7 percentage points less than that of the second quarter, the National Bureau of Statistics (NBS) announced on October 21. The grow th has been largely spurred by domestic consumption instead of foreign markets.

The Chinese economy grew 10.6 percent in the first three quarters of 2010, making the government target of an 8 percent GDP grow th in 2010 attainable.

Normal growth

Since GDP grow th reached a peak of 12.1 percent in the last quarter of 2009, China’s economic grow th has steadily slowed. The yearon-year fi rst quarter GDP in 2010 grew 11.9 percent, followed by 10.3 percent in the second quarter and 9.6 percent in the third quarter.

Li Huiyong, chief macroeconom ist at Shenyin and Wanguo Securities Co. Ltd.,said that after a period of readjustment, the Chinese economy has returned to its precrisis status.

The grow th slowdown is in effect a result of the government’s economic control measures.China took advantage of the financial crisis to phase out its out-dated production capacity and restart renminbi exchange rate reform. Those policy readjustments, meant to change the economic grow th pattern and grow th mode, led to a decrease of investment speed that ultimately pulled down industrial grow th.

Li said the massive 4 trillion yuan ($586 billion) stimulus injected into the market to counter the financial crisis in 2008 w ill come to an end at the end of this year. The Chinese economy w ill still linger along the left side of a U-shaped recovery pattern for the rest of the year due to a slowdown in the world economic recovery and uncertainties in the domestic real estate market. The GDP grow th rate w ill hit the lowest point in the fourth quarter this year or the fi rst quarter of next year, and w ill rebound rapidly in the second quarter of next year.

The Chinese economy’s soft landing after the financial crisis was good news not only for the country but also for the international market. The Chinese Government is sparing no efforts to preventing the property market and heavy industries from overheating.

Peng Wensheng, chief econom ist at the China International Capital Corp., said China will not change the direction of its macroeconomic control policies. The previous efforts to improve the economic grow th quality will be maintained and will continue to positively influence structural reform. However, faced with a fluctuating external environment and a high comparison base last year, the GDP grow th rate w ill fall back mildly.

“It’s im possible to have both fast economic grow th and economic structural readjustment. Sometimes, you need to sacrifice speed for quality,” said Peng.

Peng said the government is w ise to encourage private investment and support the new and strategic industries in conjunction w ith controlling the property market and overcapacity industries. The structural reform policies ensure that the Chinese economy w ill not slump unexpectedly, but w ill go through a steady course of slowdown and rebound.

Strong m arket dem and

In the past three quarters, total retail sales in China stood at 11.1 trillion yuan ($1.67 trillion), rising 18.3 percent compared w ith the same period in 2009. A State Information Center (SIC) report said the increasing income of urban and rural residents laid a solid foundation for consumption expansion. Starting this year, the basic pension for retired workers was raised 10 percent; some provinces and cities raised the basic living guarantee level.A ltogether 23 provinces and cities hiked the minimum wage level of 20 percent on average.Meanwhile, the shortage of skilled migrant workers has forced employers to raise employee salaries substantially.

The Chinese Government’s policies to encourage individual consumption such as selling home appliances to people in rural areas and subsidies to buyers of new-energy and energy efficient autos continue to take effect.

In the meantime, the government is striving to improve the country’s social safety net to encourage consumer spending.

SHOPPERS, SHOPPERS EVERYWHERE: Consum ers buy p roduc ts at a shopp ing m a ll in Shanghai. China’s consum er m arket has expe rienced a su rge in retail sa les

This year, the coverage of the new rural social pension system was expanded to 23 percent of all rural areas. The subsidy for basic medical insurance for urban residents and rural cooperative medical insurance was raised to 120 yuan ($18), narrow ing the gap between rural and urban residents and helping boost consumer confidence.

Domestic consum ption could have grown even larger, but was suppressed for a number of reasons. For instance, recent property market control measures have led to a slump in home sales, thus dragging down furniture, home appliance and decoration material sales. The rise in water, electricity and gas prices has also taken bites out of people’s purchasing power. Worse still, the negative real interest rate has diminished the value of residents’ deposits and wealth, making them reluctant to spend.

“In general, domestic consumption w ill maintain a stable and relatively fast grow th,”said the SIC report.

In flation surfaces

One m ajor p rob lem haun ting the Chinese economy for the fi rst three quarters this year was consumer price trends. In July, the consumer price index (CPI) grew more than 3 percent year on year, breaking the 3 percent threshold set by the Chinese Government at the beginning of this year.The index moved further up by 3.5 percent year on year in August, followed by a 3.6 percent rise in September, according to NBS figures.

The CPI was largely driven by soaring food and vegetable prices, said Yuan Gangm ing, a senior researcher at the Tsinghua University’s Center for China in the World Economy.

Data from the National Development and Reform Commission showed that retail prices of grain in 36 large and mediumsized cities experienced modest grow th in September, w ith prices of pork, eggs, beef,chicken and edible oil on the rise.

A fter peak prices in the July-September period, consumer prices are bound to head south in the fourth quarter, said Zhang Yongjun, a researcher at the China Center for International Economic Exchanges. But the pace of decline m ight not be as quick as expected, he said.

M eanw hile, excessive liquidity is also adding to in flationary p ressures.New ly added loans denom inated in renm inbi stood at a dizzying 6.3 trillion yuan($944.5 billion) in the fi rst three quarters,and the amount for September was 595.5 billion yuan ($89.3 billion), said the central bank.

In wake of concerns, the central bank on October 19 announced plans to raise the benchmark one-year lending and deposit rate by 0.25 percentage points, the fi rst time it did so since December 2007.

Foreign trade totaled $2.15 trillion from January to September, growing 37.9 percent from one year ago. Of this, exports skyrocketed 34 percent year on year to $1.13 trillion,compared w ith 35.2 percent for the fi rst half of this year.

EVERYONE WANTS AN AUTO: Au to sa les ac ross the nation con tinue on an upw ard g row th pattern this year due to governm en t subsid ies and a bu llish rea l econom y

But less reliance on exports may be good news for the Chinese economy. Slack is building up on the trade front as the world economy loses steam, said a report by the SIC.

And after the breakout of the European debt crisis, many countries started to cut back on their fiscal expenditures. In addition, trade protectionism is rearing its ugly head in the Western world, casting an ominous shadow over the prospects of Chinese exports, said the report.

Domestic policies have also weighed on Chinese exporters’ com petitiveness.The M inistry of Finance and the State Administration of Taxation ordered a cancellation of export rates for a total of 406 items,including steel, non-ferrous metal and pharmaceutical products, effective last July. Prior to this, those products enjoyed rebate rates ranging from 5-17 percent.

China’s fiscal revenues amounted to 6.3 trillion yuan ($945.1 billion) in this year’s fi rst three quarters, representing an increase of 22.4 percent year on year. Of this total, tax revenues grew 24.2 percent year on year to 5.6 trillion yuan ($838.9 billion), and non-tax revenues went up 9.6 percent to 708.21 billion yuan ($106.2 billion).

Fiscal sustainability

Fiscal expenditures of the country added up to 5.45 trillion yuan ($817.2 billion),grow ing 20.6 percent from a year earlier.

The fiscal surplus stood at 853.46 billion yuan ($128 billion) for the January-to-September period, signaling that a debt crisis is almost impossible for China. It also adds luster to the country’s grow th outlook since the government is in a healthy fiscal position to stimulate the economy.

There are several reasons for the jump in fiscal revenues so far this year. First, the real economy has signifi cantly gained strength,delivering a solid boost to tariffs, business taxes and vehicle purchase taxes. Second,the product prices have been on the rise this year, driving up the total amount of tax revenues. Third, the fiscal revenues grew a modest 5.4 percent in the fi rst quarters of 2009, providing a relatively low comparison base for this year.

The fiscal revenue grew 22.4 percent in the third quarter, compared w ith 34 percent in the first quarter and 22.7 percent in the second quarter. A t a stage of rapid urbanization, China w ill experience a surge on expenditures on energy conservation and emission reduction, employment, and social security—and this can be expected to mount pressure on the country’s fiscal sustainability.