Global Trends by Martin Khor

Monday 16 August 2010

China's big balancing act

China is a giant country balancing many things all at once:  how to keep the economy growing but not too slow or too fast, and how to satisfy people's aspirations for growth but without destroying the environment or social equity

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China's growth is widely seen as the economic wonder of the modern world.  Its GDP has grown at about 10% per annum over the past three decades, the biggest economic change in world history on such an epic scale.

When the global financial struck, the Chinese economy seemingly sailed through it with only a slight dip in growth rates, which have since picked up again.

The slowdown in this year's growth from 11.9% in the first quarter to 10.3% in the second quarter and to an expected 9-10% in the rest of this year may be worrisome to some.  But such high rates especially in the present gloomy global environment are the envy of the world. 

However, behind the double-digit growth figures is a country in transition and flux, with dilemmas on the future composition of growth, and with the imperatives of further growth crashing against physical and environmental limits.

These dilemmas and contradictions were evident last week, when I was in China.  The country has been hit by the worst flooding in decades.  Heavy rains and overflowing rivers led to a massive landslide that last week flattened a significant part of Zhouqu district in the Northeast province of Gonsu, killing 1239 with 505 people still missing.

China is also trying to implement its target of reducing the energy intensity of GDP by 20% by the end of of 2010 from end-2005, as part of its climate change pledge. 

In the first quarter of this year, energy efficiency deteriorated.  So there is a government campaign to intensify efforts to meet the year-end goal.  Banks are asked to cut loans to energy-intensive firms, tax rebates to them were removed and over 2,000 obsolete steel, cement and other energy-intensive plants were ordered to close by September.

On 7 August the China Daily front-paged a startling report that more than half of China's existing residential houses will be demolished and rebuilt in the next 20 years.  Homes built before 1999 will be dismantled to make way for new development, according to a research director at the Housing Ministry. 

He explained that buildings constructed before 1949 had passed their 50-year lifespan, many built in 1949-1979 only met basic needs in a difficult time but were not meant for the

long-term and houses built in 1979-99 cannot meet the demands of modern living because of limited space or lack of supporting facilities.

This report is sparking a lively debate about the quality of existing housing, but also about the environmental consequences of such a massive re-building goal.  Each year, China uses 40% of the world's cement and steel, the main ingredients for construction, according to China Daily.

How much sand and rocks from mountains and coasts, and how much iron from mines will be needed to make the new houses if more than half the homes are to be demolished?

The economic parameters of China's future growth were also discussed at a South Centre conference in Beijing on 9 August.

Prof. Yu Yong Ding of the Chinese Academy of Social Sciences said that China's high growth in 2002-07 had been led by investments in fixed assets (especially real estate development) and exports. 

The global financial crisis hit China in the second half of 2008, with the sharp fall in exports having an effect of negative 3.5 percentage points of GDP growth in 2009.  This was countered by a massive growth of fixed asset investment by 31%, which contributed more than 8 percentage points of GDP growth.

The turnaround in the economy was enabled by a massive 4 trillion renmimbi fiscal stimulus package supported by ample credit. Much of the spending was on investment and much of that was concentrated on infrastructure rather than manufacturing, in order to avoid overcapacity, according to Yu.

China achieved a V-shape rebound, from the lowest point of 6% growth (first quarter 2009) to 11.1% (first half 2010).  China could use expansionary policies for this rebound because of its strong fiscal position (less than 3% budget deficit-to-GDP ration and US$2.5 trillion foreign reserves) and a healthy banking system (high capital adequacy and low non-performing loans).

Yu however pointed to side effects of the 2009 expansionary policy, which now constrain its continuance.  These include that the massive infrastructure investment leads to low efficiency, waste and overcapacity in the future (which may negatively affect the banking system); a concern over local governments' financial position; and inflationary pressures from excess liquidity (including driving houses prices to dizzying heights).

This led the government to have an early exit from its expansionary policies. Credit has been tightened, especially for housing developers and house buyers, and the renmimbi revalued. Yu believes that China should stick to this exit policy despite the slowing down of the global economy.

China's growth momentum has been weakening since the second quarter this year, due to the decline in new infrastructure projects, tightening credit, clampdown on real estate bubbles and as effects of some stimulus policies taper off.

But whatever happens in the near future, Yu is optimistic:  “China will be able to maintain a decent growth rate.  Its fiscal position is among the strongest in the world, its foreign reserves are also very strong.  There is no reason for pessimism at least fro the short and medium term.”  

South Centre chief economist Yilmaz Akyuz pointed to the high export dependence of China's recent growth, and said the weak growth prospects of the US and EU meant that it cannot rely on the same export-led growth.

He suggested a new growth strategy based mainly on boosting consumption through an increase in household income via higher wages and government transfers and an increase in social spending. 

This has to be accompanied by industrial restructuring.  Many of the exported goods are specific to foreign markets, and thus the excess capacity in export sectors cannot be used to produce domestic goods.  Thus China needs a new industrial and investment strategy, alongside income and demand management.           

Meanwhile, the challenges of having an equitable and balanced development was highlighted by Mr Tan Weiping, Deputy Director General of the State Council's leading group office of poverty alleviation and development.

Although China has made great progress in poverty eradication, some imbalances remain, with wide social gaps in mountainous areas, in places where minorities live and where there are epidemics, and these are the regions which are the primary task for social development.

He pointed to challenges such as environmental problems and natural disasters, new epidemics, and risks of market failures where the poor are vulnerable to international crises.

He also highlighted the migration trends with the difficulties from increased urbanisation as there is no insurance system to guarantee the migrants' social security.  The income gap is still widening between urban and rural and eastern and western regions.

In 2009 city-rural income gap was 3.34 to 1, compared to 2.2 to 1 in 1990 and the net income of the poor is only 17% of the average urban citizen, so “we have an arduous task to do.”

In conclusion, what I found in China was a giant country trying to walk on a tight-rope, keeping the economy on a growth momentum but adjusting between the components of its growth to wean from over-reliance on exports on one hand and to keep from overheating elements of the domestic economy on the other hand.     

And a country having to balance between the need to fulfil the growing expectations of its people, especially the rural poor who are migrating to towns for a better life, and the more and more obvious constraints of the environment and the need to minimise emissions.

It is a balancing act that is difficult, especially for a country with such a big population.  The rest of the world will be watching to see what happens next, for it will affect them as well.