At the Chinese National Development and Reform Commission (NDRC) press conference in Beijing last month, Zhu Hongren, deputy director of the Bureau of Economic Operations, publicly recognized the over-heating of China’s economic growth. His statements were confirmed by data from China’s National Bureau of Statistics (NBS).
For years, China’s macroeconomic policy has focused on preventing an overheated economy. Zhu Hongren’s comments indicate that China’s macroeconomic policy has not been successful. Indications are that the Chinese government might take measures to switch the macroeconomic policy from “prevention” to “inhibition” of overheating the economy.
According to the latest figures provided by the NBS, China’s gross domestic product (GDP) continues to grow. Over 5 trillion yuan (approximately US$ 648 billion) was reported for the first quarter of this year. This represents an 11.1 per cent raise in the GDP, which is 0.7 per cent higher than in the same period last year.
Meanwhile, inflation is increasing and becoming a threat to the Chinese people as China’s consumer price index (CPI) rose 3.3 per cent in March over last year. In particular, food prices increased by 6.6 per cent, which exceeds the inflation alert level of 3 per cent. In fact, overall, the overheated economy only represents one aspect of China’s economic problems.
After many years of the macro-economic control policy, the deterioration of China’s economic structure has actually accelerated. This trend demonstrates the serious dependence of Chinese economic growth on exports and investment.
At the beginning of 2007, the Chinese government was determined to focus on controlling the trade surplus. However, exports grew by as much as 27.8 per cent in the first quarter. The foreign trade surplus reached as much as US$ 46.4 billion, which is nearly double last year’s foreign trade surplus. This increase has further led to the rapid increase in foreign exchange reserves, which was reported at over US$ 1.2 trillion at the end of March. As a result, the Central Bank was forced to release more yuan to the market, which eventually counterbalanced the monetary policy to prevent China’s economy from overheating. This will no doubt put more international pressure on RMB appreciation.
Controlling the scale of investment in fixed assets was another macro-economic target. However, the fixed-asset investments accounted for over 35 per cent of the GDP for the first quarter of this year. This represents an increase of 23.7 per cent over the same period last year.
Further analysis of this increase demonstrates some notable features. First, urban investment growth rate was much higher than rural area investment growth rate. Second, the growth rate of real estate development was much higher than other investment growth rates. Third, the processing industry investment growth rate was much higher than investment in agriculture or the service sector. These clearly show lack of improvement in the Chinese economic structure. The lagging of service sector development in China will continue to increase the pressure on energy, resources, the environment, unemployment, and so forth.
China’s distorted economic structure is largely due to lack of coordination between the macro-management system and policies. For example, the central enterprises and local government-affiliated enterprises have a majority share in the investment growth rate. Particularly some of the increased investment in the high energy-consumption industries is in fact driven by State monopolized industries.
Meanwhile, the Central Bank has failed to effectively control bad debt losses. The narrow measure of money supply and broad measure of money supply growth rates have reached 19.8 and 17.2 per cent, respectively in the first quarter of this year. This is one of the main reasons why China’s economy is progressively overheating.
In addition, the undervalued RMB and ignoring of environmental pollution have in fact artificially depressed industrial production costs. Thus, the important cost factors in manufacturing and production are distorted, and the dependence of the national economy on exports and investments are further intensified.
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