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China needs consumption growth: expert

By Michael Barris in New York | China Daily USA | Updated: 2014-02-18 10:48

China made no headway last year toward its goal of growing through domestic consumption, as investment accounted for more than half the nation's economic activity, a US expert on China's economy said.

"We just didn't see any progress," David Dollar, a former US Treasury Department economic and financial emissary to China, told China Daily in an interview.

Dollar said that although China's gross domestic product grew 7.7 percent in 2013, beating the government's 7.5 percent target, the nation's economy still hasn't seen the changes that many economists say would set it on a sustainable course for growth - chiefly greater domestic consumption and less investment and export-driven growth.

"My main concern is the majority of growth (in 2013) came from investment," said Dollar, who held the Treasury post from 2009 to 2013 and now is a senior fellow at the Brookings Institution's John L. Thornton China Center in Washington.

Government data last month showed capital formation accounted for 54 percent of China's economic growth last year, exceeding the 50 percent share taken up by consumption. Public investment accelerated during the second half of the year as the government sought to boost lower than expected growth from the first half of the year.

The results underscored the challenge that China faces in trying to emulate countries with consumption-driven economies after three decades of double-digit growth generated predominantly by exports and investment. Despite its need to reduce investment, investment-related growth has actually increased slightly, Dollar said.

"It would be fair to describe the situation as somewhat stable in how GDP is divided between investment and consumption," Dollar said. "But I think China needs a transformation where it relies more on consumption."

The idea of investment driving more than half of GDP growth is unprecedented in a large economy, Dollar said. "The risk there is that there's too much investment in certain sectors. You are building up the capital stock very quickly, housing stock, manufacturing capacity, local government infrastructure. I worry that if you build that up too quickly, some of that will be inefficient investment. It doesn't generate the return and that traces back to weaknesses in the financial system".

China's dependence on credit-fueled growth deepening in recent years led to its central auditing agency reporting in December that the total debt of local governments in the country had soared to nearly $3 trillion.

The growth of the debt load sparked warnings that China's 56.9 trillion yuan ($9.4 trillion) economy could be headed for a catastrophic crash. US business magnate, investor and philanthropist George Soros, citing the "unresolved self-contradiction" in China's policies, wrote in a Jan 2 essay on Project Syndicate, a global affairs commentary website, that China's debt growth "cannot be sustained for much longer than a couple of years".

His view, however, was countered by Nicholas Lardy, a senior fellow at the Washington-based Peterson Institute for International Economics, who said people need to pay less attention to the magnitude of the debt and more to the redeeming value of the infrastructure for transportation, housing, water and environmental protection it helps to finance. "China needs more infrastructures," Lardy said.

Dollar said all eyes will be on the 12th National People's Congress when it convenes for its second annual session in Beijing on March 5, for a sign of change in debt-management policy. The gathering will be President Xi Jinping and Premier Li Keqiang's first since taking over following last year's leadership change.

Dollar said November's Third Plenary Session of the 18th Communist Party of China Central Committee, which presented a sweeping 60-point blueprint for economic, social and legal reforms, "put out pretty interesting resolutions". It "would be natural for the National People's Congress to follow up with some specific details," he said.

"I'm waiting to see if they did really move ahead with reform that would raise people's incomes, give people more mobility that should lead to more consumption. I'm going to see if they did move ahead with financial liberalization," he said. "That's one of the features that biases the system toward investment and away from consumption."

michaelbarris@chinadailyusa.com

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