China too reliant on exports, fixed-asset investments: expert

Resurgent economic growth won't be sustainable unless government adopts timely reforms to halt construction binge, Chinese economist warns


China can probably achieve its goal of 8 percent growth this year, but it won’t be sustainable in the long term if the economy’s overreliance on exports and fixed-asset investments doesn’t end, a prominent Chinese economist recently said at a seminar in Tokyo.

With its exports battered by the global recession, China’s economic growth fell to 6.1 percent in the first quarter of 2009 but rebounded sharply to 7.9 percent. The next question is whether that growth is sustainable or just temporary, said Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

Given China’s strong fiscal position today, it would be easy for the government to achieve annual GDP growth of at least 8 percent through expansionary fiscal and monetary policies, said Yu, formerly a member of the central bank’s monetary policy committee.

Yu was speaking at a seminar organized Oct. 5 by the Keizai Koho Center under the theme, “Global financial crisis, China’s macroeconomic situation and policy responses.”

Two months after the Lehman Brothers shock of September 2008, Beijing announced a 4 trillion yuan stimulus package — equivalent to 14 percent of China’s GDP — that would be spent over two years mainly on transportation infrastructure and reconstruction of quake-hit Sichuan Province.

With its vast domestic market and a debt-to-GDP ratio of less than 20 percent, “We’re entirely capable of reversing the trend . . . to maintain growth of at least 8 percent” and perhaps keep that up for two to three more years, Yu said.

“But how about longer term? Then I am not so confident,” he said. “Without changing China’s growth pattern and implementing structural reforms, I don’t think growth can be sustainable in the long run — in five years or 10 years.”

China’s rapid growth has been investment-driven and export-led, Yu said. Its investment-to-GDP ratio is much higher than what Japan’s and South Korea’s were during their high-growth periods, and heavy investments in real estate have resulted in excessive focus on steel, concrete and cement production, he added.

The rebound of China’s economy is good news, but its excessive reliance on investments is worsening, Yu noted. While GDP is growing at 7 to 8 percent, investment is rising much faster — at a pace of 40 to 45 percent.

Of the total, investment in construction is growing at an even faster pace, he said.

And as the 4 trillion yuan stimulus package takes effect, growth in fixed-asset investments — including real estate — has accelerated so such that it now accounts for nearly 50 percent of GDP, he said.

“So you can see that after using this expansionary fiscal and monetary policy, China’s structural problems are worsening, rather than improving,” Yu said.

The problem is the low investment efficiency and environmental issues the excess investment is creating. It is also producing overcapacity, which was being absorbed by strong exports but will come to the fore now that overseas demand has been rendered unreliable by the global shock, he added.

“So the most serious challenge facing the Chinese government is to strike a balance between growth and structural adjustment . . . Growth should not be achieved at the expense of structural adjustment,” he said.

Beijing in fact has been cognizant of these problems since 2005, but the global crisis “should not be used as a pretext to postpone this adjustment,” he said.

To achieve sustainable growth in the long run, China needs to stimulate domestic consumer demand, lower its dependence on investments and improve energy efficiency, Yu said.

For consumer demand to take off, the government needs to spend more resources on providing social safety net, beefing up medical care, and providing education to the rural poor, he added.

The shock from the global crisis “offers a good opportunity for China to speed up reforms” in key sectors, such as by easing the entry barriers to the medical, education, finance, communication and transportation industries, he said.

Price controls on energy, water and electricity also should be liberalized so demand and supply can determine their prices, he said.

China should further liberalize control of interest rates and establish a more flexible exchange-rate regime, although these reforms should be made gradually, he said.

Yu, who said these statements represent his own opinion and not that of the government, indicated that China will “definitely” increase outbound investments as a means to “safeguard” its $2 trillion foreign-exchange reserves from capital losses resulting from the weakening of the U.S. dollar.

Noting that there is “no doubt” about the dollar’s declining trend, Yu said China will “definitely not sell U.S. dollars but will talk with the United States and Japan . . . to find a way to safeguard the value of China’s foreign-exchange reserves at least to minimize the possible capital losses” to its vast holdings of U.S. Treasury bonds and bills.

And one way to do that would be for China to increase — as it has already begun to do — its outbound foreign direct investment, he said.

“If China cannot reduce its current account surplus or trade surplus in a short period of time, then China will try not to translate its surplus into U.S. bonds and bills and so on, but will translate its surplus into outbound FDIs,” thereby investing in assets other than U.S. bonds, he said.

China will also “actively take part” in reform of the international monetary and financial regime, which is based on the U.S. dollar as the global reserve currency.

“Of course this is difficult and takes time, but it should not hinder China, Japan and many other countries from thinking out the reforms,” he said.

Beijing will also try to “promote internationalization” of the yuan, he said.

“This will also take a long time, but China is going to do this . . . and has taken action in this direction,” he said, citing the sale of renminbi-denominated bonds in Hong Kong and the increasing use of the Chinese currency in international transactions with neighbors like Laos and Mongolia.

“I know this is very difficult because we still have capital control and the RMB is still not convertible. So it’s impossible for the RMB to be an international currency in the foreseeable future. But we will push” for its internationalization, he said.