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Red lights flashing for China's
economy
By Li YongYan
BEIJING - In 2003, China recorded a
gross domestic product (GDP) of 11.67 trillion yuan
(US$1.41 trillion), an increase of 9.1 percent over
2002. On the face of it, that is extraordinarily good
news. But Beijing is hardly in the mood for a
celebration. Instead, the message coming out of Beijing
reflects the government's worry that the economy is
overheating and the hectic growth rate is unsustainable.
Last week, the State Council ordered a halt in
investments in three key industries: steel, cement and
electrolytic aluminum. A few days later, the People's
Daily ran an editorial lamenting the negative growth in
farmers' incomes for the past few years in stark
contrast to the high-speed increase in domestic output.
Separately, these two developments don't warrant
headlines, but taken together, they set off alarm bells
about the health of China's economy, especially when
examined in connection with their relationship to the
GDP structure.
Generally, a nation's GDP is
composed of three main parts: consumption, foreign trade
and capital investment in fixed assets.
While
the total value of China's imports and exports was put
at $851.2 billion, or an increase of 37.1 percent over
2002, the surplus narrowed considerably, by 16 percent,
as imports outgrew exports by 5 percentage points. At
the same time, foreign trade accounted for a larger
share of China's GDP. Imports are more of a useful
indicator of domestic economic activity than net
exports, as exports are subject to a lot more external
restraints. More important, export growth does not
really contribute to GDP growth as much as import
growth, one reason being that exports are severely
subject to world market constraints beyond one's
control, and that imports tend to pick up when the
domestic economy is speeding along. When the economy
begins to skid, imports will also shrink, thus further
diminishing the trade value and its contribution to GDP.
In addition, the government implemented a
subsidy program aimed at earning more hard currency.
However, widespread abuse and accumulating obligation
forced the government to scale back rebate rates
drastically. There is simply not enough in the budget to
sustain the program. This practice has also caused much
resentment among importing countries, which are now
retaliating with more anti-dumping suits against China
than ever before.
In 2000 China overtook Japan
to become the United States' largest surplus trading
partner and has held the distinction since. This makes
Washington unhappy. As 2004 happens to be an election
year and the huge trade deficit with China has provided
convenient cannon fodder for policy debates in the US,
more pressure will be brought to bear on China.
With respect to consumption, which accounts for
less than 45 percent of China's GDP (compared with
two-thirds in the US), the fault line lies in the
widening income gap between haves and have-nots, as it
has become apparent that more than 80 percent of all
bank savings belong to less than 12 percent of the
investors. Worse yet, the largest demographic group -
farmers - have actually seen their incomes decline
continuously, so much so that the Chinese Communist
Party's mouthpiece urged the issue to be addressed "in
earnest".
However, to address the root of the
problem, the government needs to look in the mirror.
Chinese farmers are unfairly subjected to high taxes.
Often, they toil all year in the fields only to end up
owing the government a variety of levies and taxes.
Anyone who is anyone in the government hierarchy, from
the state level all the way down to counties and
townships, can go in and slap the hapless farmers with
one form of tax or another, legitimate or otherwise. The
farmers have been systematically victimized, first by
the state, which monopolizes the purchase and sale of
grain at an artificially low price, then through an
exorbitant tax regime. Even now, when the People's Daily
has recognized the significance of farmers' income to
GDP, the state is still proceeding, from an economic
point of view, as if the farmers are to blame for not
driving GDP higher.
Over the years, statistics
show, investment in fixed capital has a correlation
factor of 0.87 to GDP growth. So it is not surprising
that when all other measures fail, the Chinese
government relies on a "capital investment" strategy to
boost domestic output. Since all banks are owned by the
government, and only state-owned enterprises are allowed
to issue bonds, the government alone must finance heavy
industries' projects.
For the first 11 months of
2003, China's industrial investments saw an average
increase of 43.8 percent above 2002's level. Such
sectors as raw materials (metals, chemicals) registered
a whopping 82.8 percent jump in investment. For the
first quarter of 2003, investment in the steel sector
rose by 153.7 percent over the previous three months. It
all looks dizzying, but the problem with this is that it
brings about long-term ill effects. By nature,
government is synonymous with inefficiency and waste.
These industries are building themselves into
overcapacity with no corresponding increase in
consumption for their products. For example, the
production capacity for aluminum will outstrip the
predicted needs by 3 million tons, or 30 percent, in
2005. Belatedly, the GDP-obsessed government in Beijing
has realized that high consumption and waste of
resources and energy cannot continue.
That is
why the red lights are now flashing for China's economy.
It is impossible to keep pouring money into
infrastructure without increasing the bad-debt burden on
an already shaky banking system. With less investment
from the government, with no financing available to
non-government sectors, with no hope of external trade
to replace capital investment as the driving force, with
income, especial that of the vast majority of farmers
actually declining, the national economy is bound to
lose steam.
The dilemma thus facing Beijing is
truly unpalatable. On one hand, it can't afford to
continue its investment-driven policy to keep GDP
growing. The price is unbearably high. On the other
hand, it can't really afford to let the economy run its
own slow course, as a host of equally, if not more,
serious problems will arise - not the least of which is
rising unemployment. Another danger is that foreign
direct investors will be less interested in China.
Unfortunately, there is no panacea for these
problems - nor is there a quick fix. For now, the urgent
task is to find a way to minimize the impact of a
decrease in capital investment on the economy and to
lessen the burden of Chinese citizens.
(Copyright 2004 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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