2010-06-23 08:55

Domestic consumption boost vital for strong growth momentum

WASHINGTON/BEIJING - China must gradually phase out stimulus policies and focus on boosting domestic consumption to maintain its strong growth momentum amid rising inflation and the unfolding European debt crisis, senior economists from the United States and China said on Tuesday.

The comments come ahead of the G20 leaders meeting in Toronto, Canada on June 26 and 27. A wide range of topics are expected to be discussed at the meeting including the timing for stimulus exit of various nations and the European debt crisis.

"(For China), the stimulus has run its course and it's time for the economic stabilization policies to return to normal," said Barry Bosworth, senior fellow of the Economic Studies Program at the Brookings Institution in Washington.

China unveiled a 4 trillion yuan stimulus package and directed nearly 9.6 trillion yuan of new lending into the market last year to prop up the slowing economy amid the global financial crisis. The mammoth stimulus has effectively bolstered economic growth, but also led to side effects like rising inflation and asset bubble risks.

The nation's consumer price index, a major gauge of inflation, rose to 3.1 percent in May, the highest since November 2008, exceeding the government's annual target of 3 percent.

The recent clampdown on the property market and the developing European debt crisis have brought more downside risks to the Chinese economy, and policymakers appear to be reluctant in withdrawing from the stimulus measures.

"There is no need to exit the stimulus right away, but you have to think about it and phase it out, because in the short term the economy is overheating," New York University economist Nouriel Roubini said, adding that there is little possibility that China will witness a drastic economic slowdown like it did in early 2009 amid the global financial crisis.

In a move that clearly reflects the nation's intent to press ahead with its exit strategy, the central bank said on Saturday that China will abandon its currency peg with the US dollar, an anti-crisis policy that lasted for 23 months, and pledged to allow more flexibility for the yuan's exchange rate by pegging it to a basket of currencies.

"The extent to which the yuan appreciates and helps in checking inflation would also help in delaying other tightening policies," Wang Tao, chief economist with UBS Securities, said in a recent research note.

Zhang Xiaojing, an economist with the Chinese Academy of Social Sciences, said the central bank is unlikely to hike interest rates in the near term, as the uncertain European situation and the likely property market correction following the earlier clampdown have faltered policymaker's plans to implement more tightening measures.

Despite the near term downside risks, economists are still upbeat about China's overall economic growth and said it was appropriate for the country to focus on solving long-term structural issues.

"China's main challenge is to shift its focus on boosting consumption, the service sector and income growth, rather than on the manufacturing sector," said Rachel Ziemba, senior economist for China issues at Roubini Global Economics.