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Cooling the Fires of China's Fast-growing Economy
2007-09-17 00:00
    Tianjin Development Zone thrives on foreign investment, but when it recently rejected a large foreign paper-processing project, there was little concern.

    The plant was one of more than 100 enterprises rejected by this zone in the largest northern China port city in less than one year because of its heavy energy consumption and pollution.

    "This is in line with the central government's efforts to boost the economy while saving energy and protecting the environment," says Li Yong, chairman of the zone's administrative committee.

    (Photo shows Tianjin Dongjiang Free Trade Port Zone under construction. In 2006, cargo throughput amounted to 250.2 million tons in Tianjin Port, making it one of the busiest seaports in the country.)

    Likewise, Wuxi City in eastern China has refused a 1.8-billion-U.S. dollar papermaking project. Shanghai Songjiang Industrial Zone turned down a 1.9-billion-yuan polluting project. And Jiangsu Kunshan Industrial Zone actually spent 500 million yuan to move away polluting enterprises in the past three years.

    The government's strategy and tactics of absorbing foreign funds have altered from "swapping the market for technology" in the late 1970s when China started its economic reform and opening to the outside world, to "locally attracting foreign funds" to boost regional economic development in the 1990s, and the use of low-pollution or high-end projects now, says Professor Xu Fu of Nankai University in Tianjin.

    Industry officials state that the new focus is not on raw growth, but on the cost it incurs, as the country pursues sustainable development.

Moving too Fast?

    China has been striving for "rapid and efficient" economic development over the past decade.

    Since 1990, China's economy has been expanding rapidly, averaging an annual growth rate of almost 10 percent. At the end of 2005, China overtook the United Kingdom to become the fourth largest economy in the world by nominal gross domestic product (GDP), after the United States, Japan and Germany. Over the past five years, China has contributed a yearly average of around 13 percent to the world's economic growth.

    However, China has paid a price for the blind pursuit of GDP – its high energy consumption, accompanied by high pollution, has threatened its sustainable development and prompted criticism from around the world.

    One of the side effects of China's rapid rise has been the sacrifice of the environment. Huge burgeoning coal plants are being constructed around the country to feed the increased demand for energy.

    Industry officials comment that the deplorable record in energy efficiency is one of the motives behind the government's changes, listing efficiency at the top of the economic agenda.

    Ma Kai, minister in charge of the National Development and Reform Commission (NDRC), has pledged, "We will continue to change the country's pattern of growth this year, by further reducing energy consumption and pollution."

    And President Hu Jintao has voiced concern too: "Governments at all levels should strive to better control economic growth and prevent the economy from overheating."

Rein in Investment

    China's economy remains highly investment-reliant. The first half of this year saw a 25.9 percent growth in fixed assets investment to 5.41 trillion yuan, despite a slowdown from 29.8 percent in the same period last year.

    The investment hike is attributed to excessive liquidity and surging investment in new projects, says Li Xiaochao, spokesman with the National Bureau of Statistics.

    Official figures show the January-June investment in new projects grew 6.4 percent, compared with 6.1 percent in the first five months of this year.

    "Low investment and resources costs also spurred enterprises to accelerate investment in some sectors," says Li.

    Investors were also lured to sectors with large profit margins such as iron and steel.

    Ma Kai warned the basis for economic development is not solid enough, the rate of GDP growth is still too fast, and the sacrifices involved are too high. As a result, the government will continue to rein in fixed-asset investment.

Balancing Trade Deficit

     Balancing international payments has become one of the Chinese government's top priorities.

     Chinese leaders have pledged to redouble efforts in expanding imports and investment abroad, while maintaining rational export growth and encouraging foreign investment.

     According to Customs figures, China's aggregate surplus of foreign trade soared to 136.81 billion dollars in the first seven months of this year, an increase of 81 percent over the same period last year.

    Having attracted more foreign investment than any other developing country for 15 consecutive years, China is estimated to hold some 1.33 trillion U.S. dollars in foreign exchange reserves.

    This growing surplus has led to frequent trade friction, while the large international payments surplus has added pressure for appreciation of the Chinese currency, Renminbi (RMB).

    Experts say too much foreign exchange has forced the central bank to issue more RMB, causing excessive fluidity in the domestic financial market. Instead, they propose, the government should focus on bringing in advanced technologies, management and foreign expertise.

    According to officials, the government will continue its strategy of "going global", by encouraging domestic companies to invest abroad.

    Outbound investment by Chinese enterprises is still in the start-up stage, but has recorded rapid rises, said Assistant Minister of Commerce Chen Jian.

    Figures from the Ministry of Commerce show outbound investment hit 16.1 billion U.S. dollars in 2006, rising 31.6 percent year on year. Outbound investment topped 4.27 billion U.S. dollars in the first quarter of this year, up 22.7 percent.

    Chen forecast total outbound investment would reach 66 billion U.S. dollars in the 11th Five-Year Plan period (2006-2010), and jump to about 30 billion U.S. dollars by 2020.

Expanding Domestic Demand

    Of China's three major economic driving forces – export, investment and domestic demand, consumption at home is now the priority.

    While investment slowed in the first half of this year, consumption is lending more strength to economic growth, according to the National Bureau of Statistics.

    Retail sales in the first half rose 15.4 percent, 2.1 percentage points higher than the figure of the same period last year, bureau spokesman Li Xiaochao says.

    "The changes in domestic demand since the beginning of the year are what we expected."

    Li attributes the fast growth in consumption to the rapid growth in incomes.

    "The good performance of Chinese businesses in recent years and government subsidies for low-income families and farmers as well as higher minimum wages for rural workers helped increase the incomes of urban and rural people," Li says.

    China's rapid economic growth has brought nearly 200 million people out of poverty over the past two decades, but the unbalanced development has also left millions of the poor struggling in agony with rising educational, medical and housing costs.

    As a result, Chinese people would largely save huge amounts of money for the education of their children and for healthcare costs. This has also fueled investment in the stock markets as people see better returns on their money than savings interest income. They are less inclined to buy things – particularly expensive imported goods – that are not seen as necessities.

    "This year, we will completely stop collecting tuition and miscellaneous fees from all rural students receiving compulsory education," Premier Wen Jiabao   announced in March this year, adding that the policy will ease the financial burden of 150 million rural families with children attending primary or middle schools.

    Wen also announced an ambitious plan to set up "a nationwide basic minimum cost of living allowance system" for the rural residents, who traditionally had no access to social security coverage.

    Other major spending plans include a 201.9 billion yuan investment from the central government to improve the social security network, and a 10.1 billion yuan subsidy from the central budget to expand the coverage of a cooperative medicare system to 80 percent of China's rural areas.

    "As the government has put more into education, medicare and housing, people are inclined to spend more, resulting in rising sales of automobiles, consumer electronics, housing and furniture," Li Xiaochao says

Sustained, Fast Growth

    "China will continue implementing and improving its macro-economic control policies, stick to a prudent fiscal and monetary policy and strive for stable and fast economic progress," says Finance Minister Jin Renqing.

    This means "the government will continue to rein in investment in overheated sectors and channel money towards fields that concern people's livelihoods. The government will use market mechanisms, such as interest rate adjustments and reserve requirement ratios, to strengthen controls in 2007," according to Wang Xiaoguang, an economist with the National Development and Reform Commission.

    Wang believes the government will try to reduce the widening gap between urban and rural areas by directing more investment into the countryside. However, he says rural investment will not increase sharply in the short term, and rural development will mainly be driven by industrialization and urbanization.

    Despite the central government's use of macro-economic policies to rein in overheating development, Chinese experts largely agree the entire economy will maintain the momentum of sustained and fast growth in the next two years.

    "This is because China is creating favorable environment for the convening of the 17th National Congress of the Communist Party of China this year and the hosting of the Olympic Games next year," said Lu Zhongyuan, an expert of the Macroeconomic Research Institute of the Development Research Center of the State Council.

    Other factors helping boost China's economy include the improvement of consumption patterns to upgrade industry, the acceleration of industrialization and urbanization, nongovernmental investment and rapid economic growth in central and western China.

    Lu predicts China's GDP growth in 2007 will be 11 percent. In the medium to long term, economic growth will slow down with GDP growth forecast at 10 to 11 percent in 2008 before dropping below 10 percent.

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