Opinion

Crucial period for economy

By Zhang Monan (China Daily)
Updated: 2011-05-10 14:22

Slower economic growth may help to smooth upgrading of development and overcome middle-income trap

China's slowed economic pace in the first quarter, as indicated by a slight decline in its investment, export and consumption growth, is a combined result of the country's changed internal and external economic circumstances as well as its ongoing policy adjustments and economic structural rebalancing. It is also the result of some congenital defects in the country's internal economic development and a "bottleneck" effect.

China's recent economic growth has been achieved in a severe external environment, especially since March. A slew of uncertainty factors - from Japan's nuclear radiation leaks, the tumultuous political situation in Libya and the sovereign debt crises of some nations, to rising global inflation pressures and divergences in the monetary policies of various countries - have once again cast shadows over the nascent and struggling global economic recovery.

The uncertain external environment and dwindling external demand, together with all-inclusive macroeconomic policy regulation, have directly resulted in an economic decelerating in the world's second largest economy.

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In a move to ease trade frictions with some of its major trading partners, China adopted a trade rebalancing strategy in the first quarter in a bid to boost imports, directly resulting in a trade deficit, its first quarterly trade deficit in six years.

At the same time, the adoption of a tighter monetary policy has played a big role in the decline in its investment growth rate. The strict measures to rein in the real estate sector, whose investment accounts for nearly a quarter of the country's total fixed assets investment and whose value accounts for about 6 percent of its GDP, also helped.

The growth rate of consumption has also slowed in recent months. Statistics show that the retail value of China's consumer goods grew by 16.3 percent in March from a year earlier, gaining 0.5 percentage points on the previous two months. But the figure was still 1.6 percentage points lower than the same period in 2010 and is actually much lower if the 5 percent quarterly inflation rate is taken into account.

The dampened demand in the real estate and auto sectors has contributed a lot to the decline of China's domestic consumption in the past few months.

In addition, the accumulated effects of the country's monetary policies are likely to produce some substantial influence on the country's future economic growth. China's central bank has raised reserve requirements for domestic commercial banks nine times since last year, bringing their reserve ratio to a record 20 percent.

This, together with four interest rate hikes, has ushered in comprehensive credit tightening. Statistics show that China's loans in the first quarter decreased 300 billion yuan ($46.18 billion) from the same period last year, which, together with the decline of M1 and M2 supply, will help put a brake on the country's economic growth in the future.

This year marks the start of the 12th Five-Year Plan (2011-2015) period, during which the central government has promised to bring its fast-growing economy onto the track of normal, healthy and sustainable development, as China's annual average GDP growth rate of 10.48 percent over the past decade has brought various risks.

The decades-long emphasis on economic growth has resulted in the establishment of an extensive economic development model, featuring an excessive emphasis on industrialization, the development of heavy industries and an over-dependence on export and investment. Such a growth model has seriously endangered the country's environment, climate and over-exploited its limited resources.

The high-speed growth of the past decade has also affected the country's potential for future economic development. China's marvelous economic performance over the past decades has been based on its demographic dividend, its market-oriented reforms and globalization.

However, with the gradual loss of these advantages, China's growth is heavily dependent on the low-cost use of labor, land and resources, which is not expected to last much longer. The rocketing prices of global raw materials and huge pressures for the country to appreciate the yuan, accompanied by the growing difficulties in maintaining low wages, high energy consumption and a high export tax rebate, means China's quantity-based exporting sectors are under severe pressure from global competition.

Besides, China's ever-declining investment efficiency, its huge energy consumption as well as its lack of an all-inclusive welfare network, the polarization of the wealth distribution and the decrease in the middle class population are all signs that the country is being plagued by the "middle income trap".

According to the International Monetary Fund (IMF), China's per capita GDP was $4,382 in 2010, an income level that means a turning point for a country's economic development.

The slowed economic growth rate is expected to help China reduce inflation pressures to some extent and more effectively regulate its frenetic real estate industry. It is also expected to ease the country's monetary supply pressures. But these also mean that the country's economic development has entered a crucial "bottleneck" period.

To smoothly push forward long-overdue economic restructuring and survive the period of transition, some sweeping and systematic reforms are badly needed to bring the world's second largest economy onto a normal and sustainable track.

The author is an economics researcher with the State Information Center.