China’s National Bureau of Statistics recently issued economic data for the first half of the year, showing that the country’s gross domestic product (GDP) grew by 10.9 percent and fixed asset investment increased by 29.8 percent, 0.9 and 4.4 percentage points higher, respectively, than the same period last year. How should one view these figures related to China’s economic performance? Is the country’s economy overheating now? What is the trend for the second half of the year? In an article in People’s Daily, several government officials and economists responded to those questions. Excerpts follow:
Overheating or not?
Fan Jianping, Deputy Director of the Economic Prediction Department of the State Information Center
For the first half of the year, the characteristics of the economic performance can be summarized in two phrases: full-speed growth, increasing month by month. The economic expansion occurred in some areas but the general trend is good. It is not necessary for China to slam hard on the brakes because the economy is not overheating to such an extent.
Fixed asset investment and export demand are the main forces in stimulating economic growth. The illusion of bubbling demand resulting from excessive monetary liquidity is expanding and the consumption factor continues to be marginalized. This kind of growth pattern can be maintained in the short term, but will bring about problems in the long run.
Yuan Gangming, researcher at the Institute of Economics of the Chinese Academy of Social Sciences
Except for the monetary credit, all other indicators increased in the second quarter and exceeded the expected security margin. In terms of these figures, the economy may have overheated.
However, if we look behind these figures, compared with 2004, the current situation is different. First, there is no inflation. The consumer price index is low and producer prices of industrial products have been maintained at a low level. Second, a significant portion of the growth resulted from the breaking of bottlenecks. Third, except for real estate, there is no other industry showing excessive growth. And fourth, investors did not have excessive expectations.
It is not appropriate to draw the conclusion that China’s economy is overheating only judging from the figures. But the sustained high growth does contain risks for overheating. China is now dancing on a blade regarding its economic growth. It is standing at a marginal point. If the situation is handled properly, it will be able to absorb its internal overheating investment and escape from an inflation disaster, and thus it can simply keep on running by maintaining a growth rate of over 10 percent. But if handled improperly, the economy probably will overheat. We must maintain high vigilance against such a risk.
Li Daokui, Director of the Center for China in the World Economy at the School of Economics and Management of Tsinghua University
In China’s current economic growth structure, investment factors account for 40 percent or an even higher proportion, which makes the structure quite unreasonable and engenders a considerable risk. Even in their fastest economic growth period, Japan and South Korea never had a ratio of more than 38 percent. Whether or not such a high proportion of investment can be transformed into effective projects in the future is hard to tell.
Wang Xiaoguang, Director of the Economic Operation and Development Research Office of the State Development and Reform Commission
Apparently, investment was overheating in the first half of the year, which may have three negative effects. First, an overcapacity is about to occur in two or three years. Second, many low-efficiency and low-level enterprises can carry on, which will actually weaken macroeconomic efficiency. And third, it will delay the improvement of China’s economic growth model.
Causes of accelerated economic growth
REAL ESTATE BOOM: China has announced a series of measures to curb investment in real estate projects, for fear of a property bubble
Fan Jianping
From an international viewpoint, during the first half of this year, global economic growth generally exceeded expectations. Excessive currency flows and demand have become a global phenomenon, which has created a favorable environment for China’s exports. With the world economic growth, strong demand on Chinese exports offset the effect of the renminbi appreciation. In the first half of this year, although China’s exports slowed down a bit, its surplus still expanded by a large rate. An increase in demand in foreign trade stimulated GDP growth.
From the domestic point of view, the elimination of short-term bottlenecks accelerated economic growth vigorously during the first half of the year. The projects involving investments in electricity, railways and coal in the past several years have gradually been put into operation. As a result, the supply shortage of coal, electricity and transportation was remarkably alleviated in the first half of the year. Industrial growth, which depends on these supplies, has thus directly contributed to the high economic growth.
The government has pursued prudent fiscal and monetary policies. However, the policies have been hampered during the implementation process.
Wei Jianing, Deputy Director of the Macroeconomic Research Department under the State Council Development Research Center
With regard to fixed asset investment, we cannot attribute all the problems to the local governments. From January to May, the growth rate of Central Government-funded projects was 22.7 percent, 12.6 percentage points higher than the same period last year, while the growth rate of local projects was 31.3 percent, 2.5 percentage points higher than the same period last year. This phenomenon is worth mentioning.
Li Daokui
Since the country’s reform and opening up, and especially in the last five or six years, the proportion of investment poured in without the involvement of financial intermediation sectors to the total fixed asset investment has been growing, while the commercial banks’ share has been declining year by year. Commercial banks have gradually been marginalized, which is one of the reasons why the monetary policy did not work. With their small proportion, the leverage function of the commercial banks is of course quite limited. This phenomenon is also directly related to the increasing proportion of the non-state-owned economy in the national economy.
Yuan Gangming
The growth rate of renminbi loan balances in June was 0.73 percentage points lower than that of May, which shows that the controlling measures have taken effect. Although the effects were not that obvious, it was the first time for China to adjust its loan policy without using administrative means in many years. I hope that the policy will continue in the second half of the year. The government should continue to use economic instruments and allocate resources by market adjustment. There are still many market instruments that can be used.
Proposals for future development
Fan Jianping
There is no need for a comprehensive adjustment now, but timely slight adjustments are necessary. The pressing task is to enhance the effectiveness of regulatory policy measures and to ensure their implementation. Otherwise, if the patients don’t take their medicine, what is the point of constant prescriptions?
Now, some foreign countries have already raised their interest rates to control the currency liquidity. The world economy is likely to slow down next year. China’s exports will be the first to be affected, which will trigger a series of influences.
Talking about this issue, many people will ask: First, with such a high savings rate, what else can we do if not invest? Second, with such a high production capacity as a result of active investment, what else can we do other than export? Indeed, a high savings rate will lead to a high investment rate, and a high investment rate will lead to a high export rate. This will result in rapid economic growth. To stop this cycle, we must first address China’s high savings rate. We should notice that currently both the residential savings rate and government and enterprise savings rates are rising significantly. The government and enterprises have both obtained excessive shares from macro income distribution and then converted them into investment capacity.
Therefore, in the final analysis, this is a matter of distribution. The fundamental way to solve the problem is to improve China’s macro income distribution structure and increase the residential income share. At the same time, efforts should be made to adjust the expenditure structure of the government and enterprises. The government should increase its input in social security and public utilities, while enterprises should shoulder their social responsibilities.
Wei Jianing
It is not a good thing to have the economy growing all the way up. China should be determined to pursue some macroeconomic regulation to resolve some long-term problems. We have been talking about implementing prudent fiscal monetary policies all the time. But can we change the method? We should give a specific definition to the word “prudent” and clearly stress that we should change from a neutral monetary policy to a tight one, and for fiscal policy, we should regulate local financing acts and allow local governments to issue bonds so as to alleviate the pressure on commercial banks and the government. Meanwhile, we should adjust the financial expenditure structure and enhance the input into social security, education and medical care and encourage residential consumption.
Hua Ruxing, professor at the School of Economics and Management of Tsinghua University
The government should work hard to complete three transformations in fiscal policy. First, it needs to transform from an expansionary fiscal policy to a slightly contracting one. Second, it should transform from a construction-oriented expenditure pattern to a public-oriented expenditure pattern so as to enhance the input into social security, education and medical care and to encourage residential consumption. And third, it should transform from an urban-oriented financial service policy to a large-scale financial policy that also serves the rural areas.