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Renowned Chinese Economist On China's Economy
2004/05/22

  

       --During a recent interview with the press, Prof. Wu Jinglian, research fellow with the State Council Development Center, analyzed China's economy, with focus on the capability and potential of growth, as well as the trend of future development.


       High Value Involved in an 8% Growth

       After the outbreak of the Asian financial crisis, China faced such problems as inadequate domestic demand, a weak market and a declining growth rate. Beginning in 1998, the Chinese Government adopted a series of measures to tackle these problems. What is the situation today? The situation between 1998-99 characterized by inadequate demand on a serious scale has changed considerably, and the country's economic growth has picked up gradually, reaching 8 percent last year. The actual rate may be higher, and the quality of growth is better than that in the previous 10-odd years. This means that the 8-percent increase is of a high value. Domestic demand, however, remains low, as shown by a decline in the general price level last year. The country still has not cast aside the shadow of deflation.

       Basically, there are two factors promoting economic improvement and accelerating economic growth: first, government fiscal and monetary policies designed to stimulate demand; and second, favorable policies to enhance the vitality of enterprises that serve as the supplier. The latter policy, however, is often neglected. Following the development of state-owned enterprises, private enterprises have made more energetic progress. Coastal areas, the Yangtze River Delta, the Pearl River Delta, and Fujian and Shandong provinces have played a major role in driving up China's economic growth as a whole. These localities share a common characteristic, namely, the formation of a pattern facilitating the joint development of economies of all forms of ownership.

       Inaccurate Prediction, Why?

       Some issues seem to have nothing to do with the vitality of the micro-economy. The fact, however, is just the opposite, like increases in exports. It was predicted that the overall situation in 2002 would sour. However, the export trade did very well that year, relying on foreign-funded and private enterprises. Since non-public enterprises were permitted to handle foreign trade in 1999, the volume dealt with by them has increased continuously.

       In the first quarter of last year, predicting a second-round economic recession in the United States, quite a number of government officials and the media were very pessimistic about last year's economy. The result at the end of the year, however, was quite different. The misjudgment is mainly due to neglect of the aforementioned second factor. A correct analysis of both factors will help derive a relatively accurate estimation of the future economic development.

       Economic growth for this year is expected to reach 7 percent. Prof. Wu thinks the rate may be higher, at least coming to 7.2 percent--an average annual growth rate for quadrupling the GDP in 10 years. An 8-percent increase is possible if our work is well done, said Wu. According to the estimation of some research institutions, China's potential growth rate for this year is between 8-9 percent on condition that there is neither inflation nor deflation triggered off by inadequate demand.

       Worries Behind Success

       China is expected to maintain a high growth rate in the coming three to five years. However, some contradictions, having accumulated for a long time in the past, harbor big risks. The most threatening risks include the following:

       First, risk of the banking sector. The risk is directly revealed by state-owned banks' possession of a huge amount of non-performing assets. Since the late 1990s, the Chinese Government has adopted a series of measures to guard against the risks of the banking sector. These measures, however, are far from enough. According to figures released by relevant departments in 2002, the four major state-owned commercial banks still reported a huge amount of non-performing assets after several years of efforts. Except for the Bank of China, the three other large commercial banks all registered a capital adequacy rate that is lower than the rate required by the Basel Agreement. Reform in this field is being quickened. First, the speed for the reorganization and listing of the four major commercial banks has been stepped up. Second, shareholding banks have become popular. Third, state-owned banks have opened their doors to non-governmental capital. Meanwhile, reform of banks at and under the county level is underway.

       Second, financial risk. Last year, the ratio of China's financial deficits to the GDP exceeded 3 percent, reaching the acknowledged alarm line. Prof. Wu said the figure, not precisely calculated, only provides a data by experience that warns people to be on the alert. In China's 2003 budget, the ratio is reduced to less than 3 percent, showing that relevant departments have taken note of the problem. Another alarming line was set for the ratio of government loans to GDP. The current ratio of China is 40 percent, and it is also a data processed by experience. As shown in the accountant book, the ratio stood at 17 percent in 2002. Superficially, it looks all right. However, the accountant book records obvious debts only, and liabilities known as probable debts may exist.

       Third, risk on the capital market.

       In a word, in a sound economic situation, adequate importance should be attached to the risks that have accumulated for years in financial sectors, including state-owned banks, exchange markets and the state treasury.

       Developing Private Enterprises

       To maintain a high growth rate, it is necessary to further expand domestic demand. At present, the low income of farmers is a major impediment. Of course, measures can be introduced to stimulate urban residents' consumption. But, the income gap in many cities is being enlarged. While the low-income people are short of money for consumption, many high-income people find no outlets for their money. The root cause for a Iow consumption level lies in problems related to agriculture, rural areas and farmers. If each farmer spends 10 yuan more, an additional 9 billion yuan will be spent.

       To solve the problems related to agriculture, rural areas and farmers and urban employment, the key lies in developing small and medium-sized private enterprises. As there are too many people fed by agriculture, it is difficult for farmers to become affluent. Furthermore, China's agricultural resources are under the global average level. It is unrealistic to increase consumption considerably without transferring rural residents to non-agricultural sectors. Jobs should be provided for farmers leaving the land. In recent years, noticeable results have been achieved in increasing job opportunities. Small and medium-sized private enterprises offer a tremendous potential in this respect.

       Curbing Market Economy's Bad Effects

       Prof. Wu is optimistic about China's future economic development. Nevertheless, he calls for attention and measures to solving existing problems, as some of them are on the rise. The counter-measures include both economic and political and legal means. There is a saying that market economy is not a good economic structure, but has the least shortcomings as compared with the existing and prospective economic structures. To develop a market economy, it is necessary to promote its advantages and prevent its disadvantages. At present, defects of the market economy, such as disorder, wealth gap and corruption, have not been thoroughly eradicated. The 15th National Congress of the Communist Party of China (CPC) set the goal of building a country ruled by law. The 16th National Congress of the CPC called for efforts to advance political restructuring and build socialist political civilization. Progress in this field will provide more effective guarantees for the sustained and rapid growth of the national economy.



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