The case for a solid recovery

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By Liu Shijin (China Daily)
Updated: 2009-08-31 07:44

Positive changes have taken place in China's economy since early this year, especially in the second quarter, as the central government's stimulus package gradually begins to pay off. We have foreseen a clear and strong recovery. If the recovery can be sustained and strengthened, the world's third largest economy can grow at 8 percent or more for the full year.

It should be pointed out, however, that the economic upswing is not yet solid or balanced.

The recovery is unstable because investment in the real economy just began to pick up without full confidence; and the current increase in consumer spending, propped up by government policies, will be affected as the combined impact of unemployment and relative income decline looms large.

The recovery is not balanced as is evident from the slow recovery of the export-oriented industries in southeastern coastal areas in contrast to the fast growth in infrastructure construction and related industries. Large State-owned enterprises and major projects financed or supported by the government enjoy abundant capital. But the majority of small- and medium-sized enterprises have difficulty in getting bank loans.

The pattern of the recovery so far is not sustainable. Huge government fiscal investment cannot last long. The large amount of credit issued since the end of last year is an expedient measure and cannot be carried on.

We should make energetic efforts to maintain stability and sustain the economic upturn, with emphasis not only on "quick" recovery but also on "sound" growth. Therefore, the following three concerns should be carefully addressed.

The first is the relationship between investment growth and consumption increase. In recent months, although consumption kept growing with a good momentum, investment growth has played a leading role in the rebound process. From January to July, urban fixed-asset investments increased by 32.9 percent - a record high in recent years. We have realized the necessity for improving the consumption rate, which is a "slow variable" involving a series of structural and institutional changes.

When the economy's downtrend stopped, the negative impact of excessive growth of investment stood exposed. Because measures to expand consumption will not take instant effect, we need to strive further to readjust the investment structure and channel government investment to the consumer demand, which, in turn, can contribute more to speeding up economic growth.

The second concern is to coordinate the relationship between expanding domestic demand and stabilizing external markets. Expanding domestic demand is a long-term basic principle with which we have persisted. This crisis exposed our high reliance on external demand and severe impact of such reliance on our real economy. The rising savings rate and a corresponding decline in consumption rate in the US are structural factors that will diminish our external demand in future. So it is imperative to continue to boost domestic consumption as a long-term strategy, which would cushion the impact of plunging exports.

Making good use of two markets and two resources is also a long-term principle we must adhere to, irrespective of the impact of the crisis. Strategic planning and arrangements should be established in order to adapt to the post-crisis international environment, make good use of external resources and markets, accelerate economic restructuring, transition and upgrading, and substantially improve international competitiveness of national products, industry and the overall economy. In the short term, a stable and rising external demand will play an important role in reducing uncertainty and excessive reliance on investment growth in the current recovery.

The third concern is how to reach the targeted growth rate while creating enough jobs and ensuring social stability. In fighting the international financial crisis, we should give top priority to ensure economic growth, considering that a fall in growth rate would probably lead to closure of numerous firms, massive unemployment and social instability. The problem may worsen in the absence of a sound social security system in China.

It is vital to achieve a certain level of economic growth. What's more important is to create enough jobs, ensure social stability and protect the environment.

It should be noted that maintaining a steady and fast economic growth does not necessarily bring enough employment opportunities. Not many jobs will be created if more funds and resources are poured into capital-intensive industries, big businesses, and major projects or even some bubble-creating asset fields involving less labor demand. Therefore, more capital should be encouraged to flow into small- and medium-sized enterprises in the real economy where it can promote more employment and greater social stability.

Excerpts from a lecture to the Standing Committee of the National People's Congress by the author, who is Vice-President and Senior Research Fellow, Development Research Center of the State Council.

(China Daily 08/31/2009 page4)