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Monday, July 13, 2009

China's growth won't be high enough to sustain jobs: scholar


Staff writer

China's economy will grow at modest rates, but not strong enough to tame unemployment for an extended time without a radical change in macroeconomic policy, a Chinese scholar told a recent seminar in Tokyo.

News photo
Yuan Gangming

The sharp deceleration of China's growth in the latter half of 2008 was due more to mistakes in monetary policy than to the global financial crisis, and the massive 4 trillion yuan stimulus announced in November hasn't had a significant impact, according to Yuan Gangming, a research fellow at Tsinghua University in Beijing.

Yuan was speaking June 19 at a seminar organized by the Keizai Koho Center on the theme, "China's stimulus efforts and prospect for its economic recovery."

After recording perpetual double-digit growth since 2003, China's economy slowed to 9 percent in 2008, with fourth-quarter growth falling to 6.3 percent. The 6.1 percent growth in the first quarter of this year is "roughly half the 13 percent growth recorded in the fourth quarter of 2007," Yuan said.

China's downturn actually began in July 2008 — well before Lehman Brothers' collapse triggered the global turmoil in September, Yuan pointed out. While the Chinese government and central bank are saying that a "normal" cyclical downturn coincided with the global crisis, Yuan accused his nation's monetary authorities of going too far in tightening credit and being too slow to reverse it.

The policy was aimed at controlling inflation after the consumer price index rose as fast as 8.7 percent in February 2008. But even as prices began to fall and small and medium-size firms faced a liquidity crunch, the central bank waited until November to officially announce its shift to an "appropriately loose" monetary policy, Yuan said.

During this time, the authorities were saying that the risk of inflation was still out there and that they needed to prevent the economy from overheating, Yuan said. But they apparently had a different agenda: to drive inefficient small companies and plants out of business.

This is reminiscent of China's "planned economy" strategy of the past, Yuan said.

Recent data paint a mixed picture of good and bad news for China, with alternating upward and downward developments making it difficult to discern a clear trend, Yuan said.

For example, industrial output, which slowed to 3.8 percent in February, recovered to 8.9 percent in May, official data show.

But Yuan said the data appear to contradict the trends of many other data, including electricity consumption, which fell 4 percent from a year ago in the January-May period.

Exports also fell in May, sinking 26.4 percent on year, he said.

Yuan said he doubted the 4 trillion yuan stimulus package would have much of an impact. The measures call for massive investment in large infrastructure projects, such as railway, highway and airport construction, but it is unclear how soon they will take effect, he said. Meanwhile, large numbers of small and medium-size firms are still grappling with fund shortages and bankruptcy risks, Yuan said.

Unless there is a major shift in macroeconomic policy toward supporting smaller firms, social security reform and increasing consumer spending, China may face sluggish growth of 7 percent to 8 percent for an extended period, Yuan said. And such a policy shift is unlikely to occur in the near future because government-led infrastructure investments take several years to complete, he added.

Some in China describe the stretch of double-digit growth up to 2007 as "overheated," and say the current rate represents the "normal" state of the economy. They also say the 2009 growth target — 8 percent — is a rational goal neither too high nor too low, Yuan said.

But given China's current socioeconomic structure, single-digit growth is no longer bearable because a country with a 1.3 billion population needs to grow at a rate of at least 10 percent to create enough jobs to absorb new entrants to the workforce, Yuan said.

Anything slower than 10 percent is sure to create massive unemployment, while 7 percent to 8 percent would be "tantamount to zero growth," causing more joblessness and deflation, he said.

At the same time, growth faster than 10 percent would trigger other structural problems, such as energy shortages, overheated investment, inflation and environmental pollution. Whether to prioritize job security or these problems is the question China's economic policymakers must soon answer, he said.



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