In 2003, China's per capita GDP topped US$1,000 for the first time. This follows several years of national economic growth hovering around the 8 percent figure, the specter of currency deflation dissipating and vigorous private-sector investment. All signs seem to point to a vastly improved economy. Still, there are some weeds growing in this economic rose garden.

Premier Wen Jiabao has warned that China's economy is at a crucial juncture, and the current challenge is no less severe than that of the SARS epidemic that hit the country last year.

During the first half of 2003, bank credit expanded at an unprecedented rate and the prices for raw and processed materials such as iron, steel and cement rose steadily. In the second half of the year, grain and cotton prices began to climb, while coal and electricity were in short supply. The debate rages on among economists over whether the economic needle is approaching the red line.

International experience shows that once per capita GDP reaches US$1,000, a series of bottleneck problems in such areas as employment, environmental protection and economic development emerge.

With its per capita GDP slipping past US$1,000 last year, China -- the largest developing country in the world -- will have to make significant readjustments in its national industrial structure, points out Peking University professor and renowned economist Li Yining.

As the nation's traditional competitive advantage of cheap labor has been sapped, restructuring must be carried out without delay, Li says. Only by gradually replacing labor-intensive with technology-intensive industries can a sustainable competitive force be maintained.

The growth of per capita GDP is also likely to bring significant changes in consumer demand. The transformation in consumption patterns will affect the development of the economy, says Li, and if the industrial structure is not adjusted accordingly consumption will certainly decline.

Moreover, it is becoming urgently necessary to coordinate economic and social development. Tertiary-industry consumer demand is expected to soar, particularly in such areas as education, health, environmental protection and tourism. Structural adjustments in the service sector are essential, according to Li.

Ultimately, if the necessary restructuring following the rise in per capita GDP is neglected, the inevitable decline in consumption will damage economic development regardless of the level of investment.

But, Li notes, the structure of investment also needs to be tweaked. Emphasis should be on strengthening the competitiveness of enterprises, quickening the pace of restructuring and stimulating consumption.

This means that the credit industry, which controls the flow of invested funds, needs to be restructured accordingly, says Li. A simple, across-the-board credit crunch will not solve the problem. Instead, credit should be squeezed in those sectors that are overproducing but given slack in fields that can stimulate consumption and technical innovation.

Li sees four main reasons for the rising prices seen since last year, and offers some possible solutions to the problems.

l         Prices for raw and processed materials have been rising worldwide, and are coupled with an energy supply shortage and extensive transport requirements. China's heavy reliance on imports for energy and raw materials makes price increases unavoidable. A general credit crunch provides no solutions to these problems. Rather, both investment and credit should be expanded in some raw and semi-finished materials industries, and in energy conservation, to reduce the nation's excessive dependence on imports.

l         Poor administration of cultivated land plus frequent natural disasters equals a drop in agricultural production. To curb rising farm produce prices, in addition to expanding credit in agriculture certain non-economic measures should be adopted. For instance, the country's land-use policy must be improved to prevent farmland encroachment.

l         The enormous task of restructuring during the past years has led, unavoidably, to a lack of coordination between sectors. In a rapidly growing economy, commodities that are already limited -- such as energy -- can easily become bottlenecks to further development. Credit should be expanded in these bottleneck sectors where there is potential for sustainable development.

l         Investment fever has resulted in blind production and overheating in some industries. Carefully planned alterations should be made both to credit flow and scope to stop economic overheating from spreading.

The experiences of Southeast Asian and Latin American countries show that after per capita GDP reaches US$1,000, the economic path taken by a nation will directly influence its subsequent development.

In China, development of the economy and society must be coordinated to reduce the town-country gap, says Li. Low-income people, especially laid-off workers, should be given more attention. This does not, however, mean putting the brakes on earnings growth for the wealthier segment of the population. Rather, the government should find ways to improve employability, such as offering vocational education and training.

The diversification of both material and cultural consumer demand requires social as well as economic restructuring. Moreover, since full-fledged international competition will ultimately mean a contest of talent and skill, China's cultural and scientific levels must be raised comprehensively.

Li notes that science and technology are always primary productive forces in the process of economic development. By applying science and technology, new energy resources and raw materials can be generated. For instance, seawater can be desalinated to offset the global water shortage. In the long run, science and technology carve a path to sustainable development.

This is the path that China must follow, stresses Li. Destroying the environment and depleting available resources might be conducive to GDP growth right now, but will create endless problems for future generations and ruin any possibility of the country's sustainable development.

(China.org.cn by Shao Da May 11, 2004)