Picking Up Steam

After seven consecutive quarters of slow growth, a turnaround is underway By Lan Xinzhen

DOMESTIC DEMAND: Customers pack into a crowded shopping mall in Guangzhou, capital of south China’s Guangdong Province, on November 10

‘The Chinese economy is like a train without a locomotive, losing power all of a sudden and just gliding forward with inertia.” This is how some Chinese people have described their economy over the past two years. Now the train is beginning to whistle. After seven quarters of slower-than-usual growth, a reversal appears underway.

According to figures released by the National Bureau of Statistics (NBS), industrial output started picking up in September and October, with a rise of 9.2 percent and 9.6 percent, against 8.6 percent in August.

The troika of economic growth—retail sale of consumer goods, foreign trade and fi xed assets investment—are gaining steam. Stephen Green,an analyst at Standard Chartered Bank, said the Chinese economy is in a U-shaped recovery.

By now the possibility of a “hard landing”can be ruled out, which is undoubtedly good news for the global economy.

Although the improvement is moderate,the general curve shows a steady upturn, making economists optimistic about the future of the Chinese economy.

The Organization for Economic Cooperation and Development said in a report on November 9 that the United States is expected to cede its place as the world’s largest economy to China as early as 2016. The organization also says China’s economy is likely to overtake the euro zone’s this year.

The research institution Frost & Sullivan said China is set to become the world’s largest economy by 2025, with a nominal GDP value of $38 trillion.

Turn steady

Zhang Ping, Minister for the National Development and Reform Commission(NDRC), said at a press conference on November 10 that the previous slowdown has been controlled since August.

According to Zhang, the slowdown was due to three major reasons. First, the government lowered its expectations for economic growth to 7.5 percent, which allowed for some leeway in plans to shift the direction of the country’s economy.

Second, the international economic environment remains uncertain. Weak external demand has affected China’s export-dependent economy.

Third, when external demand shrinks,some industries suffer from an excessive production capacity, a problem that can only be alleviated over time.

The Chinese Government has made it a top priority to stabilize growth this year in order to cope with the above-mentioned issues,said Zhang.

This year, China’s central bank lowered its benchmark interest rate twice. Since the second half last year, it cut the required reserve rate three times.

Moreover, it has poured a large amount of liquidity into the financial sector. The NDRC approved many large investment and infrastructure projects this year, with a total investment volume surpassing the 4-trillionyuan ($635.93 billion)stimulus package injected into the economy after the 2008 global fi nancial crisis.

A report by SWS Research Co. Ltd.says the Chinese economy has stabilized.But different from Stephen Green’s view that the Chinese economy is in a U-shaped recovery, the SWS Research report says that within a certain period of time, the Chinese economy will be in a horizontal L-shape. According to the report, the Chinese economy in the future will resemble that between 1998 and 2002 following the Asian fi nancial crisis.

While external factors can explain the slowing economic growth, a restructuring of the economy can also be responsible. Time is needed to eliminate excessive production capacity, digest fi nancial risks and transform the country’s growth pattern. The economy did not pick up immediately after reaching the bottom, but remained at the bottom for nearly fi ve years.

This round of economic adjustment started in 2007 and the vertical part of the L-shape has now been complete, with the horizontal portion beginning in the third quarter.

“To step out of the present predicament,China should rely on reforming production rather than short-term control,” said the SWS report. Present reforms mainly concern income distribution, financial reform and monopoly-breaking reform. The changes, if achieved, are expected to help facilitate the Chinese economy’s rise once again.

A more sound economy

Future economic growth in China mainly depends on the soundness of the Chinese economy itself. Since 2007, China has launched a strategic campaign of economic restructuring.

Five years later, this campaign has greatly moved forward and the economy become a lot sounder.

Zhang says one change is that consumption has been a larger contributor to economic growth than investment. In the first nine months this year, the proportion of consumption to total GDP was 55 percent, while that of investment was 50.5 percent.

“Regarding economic development in the first three quarters, domestic demand made a contribution of 105.5 percent, while external demand was negative at 5.5 percent.We should place emphasis on development to expand domestic demand, which has the potential to maintain steady and fast economic growth,” said Zhang.

He adds that 42 detailed rules have been formulated this year to promote private investment. Thus far, the proportion of private investment has already reached 62 percent,indicating that the private economy has achieved rapid development.

NDRC statistics also show that the structure of primary, secondary and tertiary industries is more coordinated.

“In the industrial sector, the proportion of strategic emerging industries and hi-tech industries is increasing and the transformation of traditional industries is accelerating. The proportion of tertiary industry continues to rise,” said an NDRC release.

As for urban and rural development,China’s urbanization rate (ratio of urban population among total population)reached 51.3 percent in 2011.

Rural infrastructure construction, basic public services, tap water supply, electricity,roads, gas and housing in rural areas, as well as farmers’ production and living conditions,have all been greatly improved.

“Although there are still many problems, such as excessive production and extensive management in some industries,that need to be solved, we will enhance efforts to implement various policies and measures and quicken our pace in transforming the economic growth mode,”Zhang said.

Pressure remains

According to Zhang, in the NDRC’s analysis,the foundation for an economic rebound is not fi rm enough.

“Under the background of a slow global economic recovery and an ongoing fi nancial crisis, we must be prepared for dif fi culties and challenges in the long run,” said Zhang.

Qin Xiao, Council Chairman of Boyuan Foundation, said at the China Capital Innovation Summit held on November 13 that basic factors propping up China’s economic growth are changing.

First, China is currently in the middle and late stages of industrialization. The“catching-up” growth that relies on extensive input has reached its end, but present systems, human resources and the level of technology have not shown that China has the conditions and capability to leap over the middle-income trap and enter an “innovation-oriented society.”

Second, after 30 years of sustained and rapid progress, China’s urbanization has begun to slow down. The average annual urbanization growth rate is set to drop to 0.8 percent during the 12th Five-Year Plan period(2011-15)from 1.35 and 1.45 percent during the ninth and 10th fi ve-year plan periods(1996-2005), respectively. The impetus for economic growth brought by urbanization is weakening.

Growth of Major Economic Indicators

Moreover, since 2007, the number of migrant workers has been declining despite increasing wages. Some coastal cities are even suffering a shortage of migrant workers. All this indicates that a time of in fi nite labor supplies has passed. Together with the arrival of an aged society, the “demographic dividends”that China has long enjoyed is almost over.

“Significant changes of even the most basic factors will affect China’s economic growth,” Qin said.

According to Qin, the potential of future economic growth depends on systematic reform.At present, three major economic reforms are needed: a relaxation of monopoly, financial reform and income distribution reform.

Relaxing monopoly will solve the problem of inadequate effective supplies,income distribution reform will solve the problem of inadequate demand, and financial reform will improve efficiency in resource allocation.

“If the three reforms can be effectively advanced, the market and financial resource allocation problems that restrict the Chinese economy will be effectively solved, consumption potential will be fully realized and the Chinese economy will hopefully step out of its present predicament,” Qin said.