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29 Aug, 2012

China’s Economic Transition Starts

By Liu Shijin (China Daily)

Beijing, August 28, 2012 – China’s economy grew by 7.6 percent in the second quarter of this year, continuing a downward trend that began two years ago. At such a time, it’s important that we make the economy stable for the present to ensure that long-term development occurs.

The slowdown is the result of a number of short-term causes. More importantly, though, it portends a transition in the economy.

The short-term causes include the European debt crisis, which is putting pressure on China’s exports, and an expectation of slow growth and domestic price fluctuations, which will lead companies to reduce their inventories. However, a more significant underlying cause is the fact that China’s economic transition may have already started.

A few points call for special attention.

First, the Chinese economy’s fast growth has been mainly fueled by investments and spending on infrastructure. In most years, real estate contributed about half of the gains. But such investing has slowed in the past two years.

Second, a decline in the potential growth rate has begun to be seen in developed areas in East China. Such places have seen rates of GDP and investment growth that have been below the national average for those indicators in recent years.

Even so, employment has not been affected. A shortage of workers even exists in some places. And the public has become increasingly anxious about local governments’ means of raising revenue and the risks entailed in investing in real estate.

All of these signs indicate China’s economy has entered a stage of medium-paced growth. The question now is: What should we make of such a transition?

For one, it follows the laws of economic growth. On the question of supply, it is clear the changes in the relationship between supply and demand in the labor force and the greater pressures from the current scarcity of resources have contributed to the slowdown.

Meanwhile, on the demand side, the changes have been even more significant. Less leeway exist, for instance, to invest in highways, airports and similar types of projects. Moreover, the demand for industrial products made of steel, cement and similar materials is reaching a peak.

Finally, even if China’s rate of economic growth decreases to as low as 7 percent, it is still relatively high compared with that of other economies in the world. If China can maintain such a rate, it will meet its goals of having a well-off society and becoming a high-income country by about 2020.

Therefore, the current slowdown heralds an economic transition rather than the economic recession that some experts have predicted. If China can take advantage of its opportunities, it will enter a period of sustained growth.

For now, we need to halt two tendencies in their tracks.

First, some people cannot accept the slowdown and are trying to do whatever they can to boost economic growth. Although their efforts may push up the growth rate in the short term, such growth can hardly last long, and may even result in asset bubbles and overheated investment.

Second, there is either a lack of due concern about the slowdown, or simply inadequate preparation to cope with drastic fluctuations in the economy. The growth rate must be kept in a safe range to ensure a smooth transition.

China should improve its service industry and take steps to accelerate the improvement of its manufacturing industry, concentrating on high technology and adding value. It should also fuel the economy using innovation. As the country tries to tap new sources of economic growth, four important considerations now call for attention.

First, there are still opportunities to invest in railways, highways and similar projects, but heavily indebted investors can hardly take advantage of them.

Second, the country’s potential for consumption must be further realized. China’s urbanization rate is just over 50 percent. The increasing number of rural villagers who are entering cities will demand equal treatment in their living conditions, education and medical care, greatly increasing the potential for future consumption.

Third, industrial restructuring needs to be accelerated. With the economic slowdown, an excess in productive capacity will result in mergers and acquisitions.

Fourth, emerging markets overseas must be explored. According to World Bank forecasts, two thirds of global economic growth will come from emerging economies by 2030.

Whether China can seize its opportunities in this period of transition largely depends on its ability to make reforms and innovations and adjust its policies properly.

China, for instance, should accelerate urbanization and work to ensure there is a better allocation of production among rural and urban areas. It should also work faster to reform the distribution of incomes.

And it should do more to ensure its corporations can compete internationally. Besides boosting domestic demand, China should encourage corporations to explore emerging markets and take steps to cultivate multinational corporations.