After massive stimulus, a long way to go for China

(Xinhua)
Updated: 2009-03-12 23:30

BEIJING -- China's massive stimulus package seems to be taking effect as latest figures show domestic investment and consumption somewhat eased export woes. But when coming to re-balancing the Chinese economy, it's not enough.

While China can jump-start the economy with hefty government investment, it should be more aggressive in speeding up its long-needed shift of growth model to consumption and services, economists say.

Urban fixed-asset investment in the first two months of this year rose 26.5 percent year-on-year, higher than 24.3 percent in the same period in 2008, the National Bureau of Statistics said Wednesday.

Thursday's NBS data show retail sales in the same period increased 15.2 percent from a year earlier, slower than the 20.2 percent nominal growth of January-February last year but basically steady after adjusting to inflation.

However, economists say some deep-rooted obstacles on the way of re-balancing are yet to be tackled and must be reduced through advancing institutional reforms in economic, social and political areas.

Most of China's current stimulus policies are aimed at short-term growth, with relatively less attention to medium- and long-term needs, said Zhuang Jian, senior economist with the Asian Development Bank Resident Mission in China.

"Without fundamental changes in growth model, even though we ride through this crisis, we'll have the same problems when next one arrives," said Zhuang.

The Chinese government has long been ambitious to make its growth model less dependent on exports and investment and more on consumption, which is more sustainable both for the economy and the environment.

The agenda became more urgent as China felt the brunt of the global financial crisis. With foreign orders dwindling, exports plummeted 25.7 percent year-on-year in February, the worst decline in more than a decade.

Facing a crisis, the Chinese leadership has made it a paramount task to keep economic growth at a level that guarantees plenty of jobs and social stability. One of the most direct and effective way to do that is expanding investment, government officials say.

Zhuang said there's a conflict between the short-term task of maintaining growth and the long-term goal of rebalancing.

"The crux of the matter now is how to strike a balance," he said.

The State Council, or the Cabinet, has rolled out support plans for ten sectors such as steel, auto and textile. While targeting industrial growth, they also stress restructuring and upgrading.

In addition, China has adjusted its 4 trillion-yuan ($585 billion) investment package, shedding some spending on infrastructure while adding funds for medical care, education and industrial upgrading.

According to the revised version disclosed last week, 37.5 percent goes to infrastructure, 25 percent to reconstruction in southwestern regions hit by a devastating earthquake last year, and nearly 20 percent to low-income housing and rural infrastructure.

Compared with the $787 billion package signed by the US President Barack Obama last month, of which 35 percent will be spent on tax cuts and more than 20 percent on social welfare, China only plans to use 3.75 percent to fund health care, cultural and education undertakings.

Some of the package spending, in addition to a 850 billion-yuan medical reform plan, will support China's long-term development by improving people's living standards and raising disposable income of the low-income group, said senior economist Louis Kuijs of the World Bank Beijing Office.

But overall, the package by itself won't do much to rebalance the growth pattern as "most of the spending is geared to investment instead of consumption", he said.

A limit of the 4 trillion-yuan stimulus package is the lack of spending on social security, which is key to boosting consumption, said Tang Min, deputy secretary general of the China Development Research Foundation.

The think tank issued a report last month calling on the government to spend 2.6 trillion yuan by 2012 and increase that to 5.7 trillion yuan by 2020 to establish a full-scale social security program that covers all basic needs.

With meagre social security, Chinese are more willing to save their money in banks than spending it without worrying for the old age or costly medical treatment.

Besides, the sluggish reform of the country's income distributing system also slowed the pace of the income growth for ordinary Chinese.

The shares of enterprises and government in the national disposable income have been rising in China, while that of households declined 11.3 percentage points from 1992 to 57 percent in 2007, central bank figures show.

The government should make sure the income of wage-earners is at least kept at the current level, while more dividends of state-owned enterprises should be transferred to households, said Zhuang.

For Chinese farmers, who account for nearly 60 percent of the country's population, efforts are urged to make the pricing of farm produce more market-oriented and reduce the rural-urban income gaps.

Apart from tapping consumption potential, Kuijs suggested increasing the cost of industrial input such as land, energy and other natural resources to make the economy less intensive of energy and less detrimental to the environment.

Institutional reforms should also be carried out to break monopoly in service sector, give private firms more access to capital market and allow private investors play a bigger role, economists say.

About 99 percent of Chinese enterprises are of small or medium size, which are most helpful in job creation and economic restructuring and need more support than they receive now, said Tang.

The deepening economic reforms should be accompanied by institutional reforms in the political area, said Chi Fulin, a political advisor and executive director of the China (Hainan) Reform and Development Research Institute.

China last year carried out an institutional overhaul of the central government to establish "super ministries" concerning energy, transport, industry and environmental protection, aiming to streamline government department functions and strengthen macro-economic regulation.

Zhuang and Kuijs called for a greater reliance on market incentives and a regulatory system that encourage economic rebalancing, including more scientific performance evaluation of local officials.

China has said it's still open for more actions on top of the stimulus moves it's already committed to.

"The global financial crisis is still spreading and the bottom is yet to be seen," Commerce Minister Chen Deming told a press conference Tuesday during the annual session of the National People's Congress, the top legislature. "Therefore China's macro-control as of today is still a comma, rather than a period."