The postponement of the release of economic data for the first
quarter set off wide suppositions.
As a result, many expect the macroeconomic readjustment policies
will be intensified. Even the possibility of putting a brake on the
economy is not being ruled out. These assumptions led to the stock
market drop on April 19.
However, after reading the data released by the National Bureau
of Statistics, I believe the market's expectation of stronger
macroeconomic readjustment went a bit awry.
The macroeconomic policies can be expected to be maintained. The
challenge is to carry out the State's economic policies to the
letter.
Actually, although economic growth is showing signs of
increasing a bit too fast, it is not overheating.
Take the two indicators people are most concerned about -
investment in fixed assets and the consumer price index (CPI).
In the first quarter, total fixed asset investment stood at 1.75
trillion yuan (US$219.1 billion), 23.7 percent annual growth. Of
this, fixed asset investment in urban areas and townships was 1.45
trillion yuan (US$181.8 billion), a 25.3 percent rise over the same
period last year.
The CPI rose by 2.7 percent in the first quarter year-on-year,
which indicates the possibility of inflation.
But if the factors of the lingering influence of last year's
food price hikes is excluded from the calculation, the CPI rose by
only 1.2 percent in the first quarter, the same as the previous
year.
Moreover, when the factors of food and energy are deducted from
the calculation according to international conventions, the CPI
rose by only 0.9 percent.
In addition, some encouraging changes have taken place in the
economic structure in the context of rapid economic development.
For example, the portion of the service industry in the GDP rose by
large margins and consumer demand increased rapidly.
Over all, the economic situation is still in the bracket of
normality.
But the inherent problems in the operation of the economy remain
unresolved. For example, investment is growing a bit too fast; bank
loans are rising a bit too much; and favorable trade balances are a
bit too big. All these are factors that could trigger the
overheating of the economy.
What is worth attention is that high energy-consuming projects
are showing signs of rebounding, against the background of strains
on the electricity supply having been basically relieved. This
indicates that environmental damage is still being done and the
strengthening of macroeconomic readjustments are called for.
In fact, the State has formulated a package of policies to
address the problems cropping up in economic development,
particularly those involving upgrading industrial structure, saving
energy and reducing waste discharges along with issues concerning
the livelihood and well-being of the public.
However, these policies have so far failed to work effectively.
The crux of the problem is that these policies have yet to be
fleshed out in detail and have yet to be adequately enforced.
In recent years the central authorities' policies failed to be
implemented in some localities. For example, the central government
strongly advocates saving energy and reducing waste discharges but
14 provinces have found ways to offer preferential electricity
prices to high energy-consuming businesses in an effort to boost
local economic growth.
Similarly, large apartments are the main targets of the
Construction Ministry in its bid to keep down soaring real estate
price. Defying the repeated stress to cut down on construction of
large apartments, property developers in various localities
continued business as usual. In the first quarter, for instance,
investment in apartments of 90 square meters or smaller comprised
merely 16 percent of total real estate development.
In view of this, policy enforcement mechanisms need to be
introduced involving many factors such as law and ethical codes, in
addition to the printed policies, rules and regulations.
Capital's excessive volatility constitutes another factor.
Although it is only natural that capital flows from the banks
into the capital market in pursuit of profits, money's excessive
volatility serves to fan the price rises on the stock market, which
means that too much capital chases after scarce resources.
This is a matter of the central bank convincing investors that
they should re-evaluate their investment behavior rather than a
matter of the central bank's getting directly involved in reducing
capital's volatility. A combination of measures need to be
launched, involving working out ways to reduce volatility and
sending out signals of volatility reduction.
Taking into account the inherent dislocations in the Chinese
economy and the country's weak foundation for sustainable economic
development, the pace of institutional buildup and economic
infrastructure reform need to be quickened. This should be
undertaken along with short-term macroeconomic coordination.
First, a pricing mechanism, which is based on the supply and
demand for resources and on the cost of tackling environmental
pollution from production needs to be introduced.
Second, the income and distribution systems need to be reformed.
This means that the government ought to play a greater role in the
fields of education and healthcare to introduce a sound national
social security system.
Third, monopoly on profitable sectors should be done away with
and competition promoted. Sector monopoly and incomplete
competition lead to price distortion. Unreasonable price hikes, in
turn, have a negative influence on industrial-structure
readjustment and even on the government's effort to transform the
mode of economic growth.
The author is an economist with the State Information Center
(China Daily April 25, 2007)