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China's economic drivers need to change
Publication Date : 18-04-2012
Slower economic growth means measures are needed to encourage innovation and domestic consumption
China's economic growth rate declined for the fifth consecutive quarter, growing 8.1 per cent year-on-year in the first quarter this year, a little lower than the widely expected 8.3 per cent.
The lower-than-expected economic growth, together with the 3.8 per cent consumer price index, which was higher than expected, has highlighted concerns over a possible risk of stagflation and other challenges.
Statistics show that despite a decline in the profit of enterprises, China's newly added loan in the first quarter reached 2.46 trillion yuan (US$390 billion), an increase of 217 billion yuan (100 billion yuan = $16 billion) from a year earlier. However, only 832 billion yuan of loans went to the real economy as middle and long-term loans, a drastic decline from a year earlier, and as much as 1.57 trillion yuan was used as short-term loans or central bank bonds, 30 percentage points higher than last year's first quarter.
Such a huge fluidity, if not effectively absorbed, is likely to eye some production materials and consumer goods for investment, resulting in the decline of enterprises' profits and national economic growth and cause ever-growing inflation pressures.
A lingering economic recession in the United States and European countries and their rising protectionism will also negatively affect the growth of China's exports and export-driven investment.
Statistics show that China's import and export volumes were $859 billion in the first quarter, a decline of 7.3 per cent year-on-year. At the same time, the country's fixed asset investment was 4.79 trillion yuan, a decline of 2.9 percentage points. The declining export and investment momentum, if long-lasting, will negatively affect the country's economic growth speed and quality, fuel a drastic contraction in its international trade and investment scale and interrupt its balance of international payments and market-guided reforms of its currency.
Despite a 10.9 per cent increase in retail sales, the country's housing and automobile consumption, which have been two key drivers of national economic growth, both slowed in the first quarter. Statistics show that auto sales grew 11 per cent year-on-year in the first quarter, 3.2 percentage points lower than the previous year. At the same time, real estate investment was 10.6 percentage points lower from a year earlier. The decelerated growth of domestic demand will possibly cause the government to strengthen interventions in the market.
The country's fiscal expenditures in the first quarter amounted to 2.41 trillion yuan, an increase of 33.6 per cent. Despite a sizeable increase in scientific, educational and medical care input, their efficiency and quality are yet to be improved and there remain concerns over whether these investments will bolster market vitality and facilitate the entry of non-government capital, a key factor for sustainable development of the national economy.
China should first cut taxes on enterprises, especially manufacturing enterprises as a key to help its slowed economy to survive the looming challenges. An asymmetrical tax policy should be adopted, characterised by increasing taxes on monopolistic enterprises as a subsidy for the losses caused by tax cuts for downstream manufacturing and service sectors.
Reducing the tax burden on enterprises will play a bigger role than raising the personal income tax threshold in increasing personal incomes and consolidating government fiscal revenues. Any plans to count on low wages and a well-developed social security network to improve the lives of ordinary people will possibly lead to a high welfare society, such as those of some European nations.
To reduce and forestall the negative influences produced by the continuing decline in economic growth on market expectations and national confidence, China should also try to take measures to boost domestic enterprises' profit-making capability to ensure their growth.
It should adhere to the principle of free trade and strengthen international cooperation as a way to maintain their international competitiveness. At the same time, measures should be taken to create a favourable environment at home to boost their profit-making capability and increase the government procurement of domestic products.
Besides, the government should try to protect the rights and interests of consumers and create an ideal environment for their consumption, especially middle and high-income groups. This will promote the development of domestic enterprises and increase employment.
More sound and practical measures and efforts should also be taken to help transform China into an innovation and consumption-driven economy. To this end, the country should make unremitting efforts to improve its education and research to facilitate its struggling and overdue transformation into a knowledge and capital-intensive society, which appears particularly urgent since the "demographic dividend" is waning.
The country should be fully aware that its inefficient social welfare system, together with the absence of a full-fledged social security network, will weaken its capability to fend off risks and aggravate people's tendency to save. At the same time, a healthy stimulus mechanism and a market-based income redistribution mechanism should be set up to aid the country's economic and social transformation.
The author is vice-dean of the School of Economics at Fudan University.