Ways to stabilize growth

Focus should be on release of demand for lower-priced housing and shift toward energy-efficient products

In a recent inspection tour of Hubei province, Premier Wen Jiabao said the country will prioritize growth and make some well-timed and targeted adjustments to its macroeconomic policies to expand domestic demand and promote a steady and relatively fast development of the national economy.

The April data from the National Bureau of Statistics show the world's second largest economy is facing growing downturn pressures, as indicated by the decelerated growth of its gross domestic product and fixed asset investment, banking credit, and import and export volumes.

In the context of complicated and changed economic situations, the Chinese government has vowed to make some tailored changes to its established macroeconomic policy. At an earlier State Council meeting, a consensus was reached that China will accelerate the approval of some infrastructure projects, promote consumption of energy-saving home appliances and increase tax cuts on enterprises in a bid to ensure steady growth. China's central bank also announced a 50-basis-point cut for banks' reserve requirements on May 12, the second such cut this year and a third since December, which will release more liquidity. The stimulus packages are expected to reach 1 trillion yuan ($158 billion).

The increased likelihood of an economic downturn, together with a worse-than-expected external economic environment, has contributed to the "sudden reversal" in China's tightening macroeconomic policies. It is the Chinese government's belief that steady economic growth will help defuse the country's looming economic and social problems. Thus increased inputs into infrastructure construction, moves to expand domestic demand and tax reductions on enterprises are viewed as effective ways to achieve this goal.

It is good news that the central government is not depending on the real estate market for national economic growth. China's economic slowdown is to a large extent a result of strengthened efforts to squeeze its inflated real estate bubbles. The property-centered economic model adopted in previous years has not only overdrawn on the country's potential for future economic growth, but has also exacerbated its unreasonable economic structure, highlighting the necessity for regulations to curb speculation in the housing market. However, the government should be fully aware of the risks involved in extricating the national economy from its excessive dependence on the housing market and strive to transform the sector from investment-dominated to consumption-driven.

Given that real estate investment accounts for 13 percent of China's GDP a decreasing investment in this sector will directly lead to slower GDP growth. As a result of the decline in house sales, the growth of China's real estate investment has experienced a considerable decline in recent months. In the first quarter, real estate investment grew 23.5 percent year-on-year, 11 percentage points lower than the same period last year. Worse, house sales also suffered negative growth in the first quarter.

The slowed real estate growth has not only directly affected the country's GDP growth, but has also brought to a standstill many other related industries. For example, due to a drastic decline in investment in the housing market in the first quarter, the country's steel and iron industry also suffered heavy losses during the same period and its industrial overcapacity remained outstanding.

The slowdown spreading across the industries related to real estate has added further pressure to the country's broader national economic downturn. How to promote steady and relatively fast economic growth amid its unyielding efforts to regulate the real estate market remains a big challenge for the government. A housing market based on the demand for accommodation, instead of investment and speculative demand, will not only help the country resolve existing problems in this controversial sector, it will also aid the broader national economy.

Despite the ever-growing pressures from the economic slowdown, the government should fully realize the advantages and disadvantages produced by its real estate regulations. Having experienced an unbelievably fast development in the property sector over the past decade, the country should accept the unavoidable costs produced by the sector's ongoing adjustments aimed at squeezing bubbles.

A series of policies recently adopted by the government to expand domestic demand is a reflection of the government's determination to maintain its housing market regulations and its efforts to push for national economic transformation through extricating the fast-growing economy from dependence on the housing market. These efforts, if successful, will help the country find new economic growth points and bring the slowed economy back on track.

Besides, measures aimed at promoting a bigger consumption of home appliances in the country's vast rural areas and its efforts to manufacture energy-saving vehicles will also help boost slack domestic demand and facilitate its industrial structural adjustment. At the same time, the country should try to promote a fall in property prices to release more consumption for accommodation as a way to maintain steady economic growth.

The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences.

(China Daily 05/25/2012 page8)