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    China Business
     Oct 20, 2005
US's Snow supports Hu's new plan
By Antoaneta Bezlova

BEIJING - When China's communist leaders adopted a new blueprint for the country's economic development over the next five years, they hardly banked on the support of the US treasury secretary in pushing forward ambitious tasks such as equalizing growth and narrowing the wealth gap between urban and rural China.

But as John Snow, the US top treasury official visiting the Chinese countryside this week, delivered enthusiastic support for Beijing's new development model of slower growth and "social fairness", it served to illustrate how every ripple from this giant economy can now be felt across the world. ''We see the growth of

consumerism as going directly to what is most on our mind, which is the global imbalance of trade,'' Snow said, touring a rural
market in the Chinese inland province of Sichuan.

He told Chinese leaders they should increase the spending power of China's 800 million peasants to help them buy more and imported goods, and lessen the country's ballooning trade surplus with the United States. Boosting domestic demand and spurring growth in China's vast rural areas is exactly what Beijing leaders have in mind.

The latest Chinese 5-year plan, released after a dour closed-door meeting of the top leadership last week, abandoned a long-standing policy of prioritizing fast growth in favor of sustainable and balanced development. It also redirects state intervention from the urban economy towards the countryside where the vast majority of Chinese people live. Under the motto of creating a "harmonious society", President and party chief Hu Jintao has promised to raise spending on rural education and health, cut rural taxes, step up price support for agricultural products, and pay heed to protecting environmental concerns.

For decades, China's state economic plans - replete with communist-style jargon and quotas for everything from wheat to steel production, had little impact on global markets. This, however, changed dramatically after the Asian financial crisis, when Beijing decided to jumpstart the economy by launching a massive infrastructure drive to modernize cities, speed the urbanization of some 200 million peasants and accelerate the construction of highways and airports across the country.

The unprecedented spending spree resulted in increased demand for commodities, and helped drive up world prices for energy, steel, metal and cement. Simultaneously, it spurred feverish investment in power plants, steel mills and other factories. In the three years since President Hu Jintao and Premier Wen Jiabao came to power, the central authorities have tried to rein in state-driven capital investment, which their predecessors saw as a strategy of generating jobs and staving off popular discontent.

The new blueprint affirms Hu and Wen's intention to put a lid on runaway growth for the sake of boosting the incomes of people living in rural areas. Whether the leadership succeeds in its policies would have implications for the world economy as the side effects of a slowdown, or by contrast, a continuing boom, have an increasingly global reach.

While full details of the plan won't emerge until early next year when the Chinese parliament is scheduled to vote on it, analysts say the new road map is designed to slow annual growth from the average 9% over the last decade to a more benign growth of 7%, and to combat some of the imbalances which are provoking social unrest, particularly in the countryside.

For years, Chinese peasants and agriculture have supported the growth of the country's cities and the increase of urban wealth. ''In the next five years, we expect cities to repay the villages, and industry to repay agriculture,'' says party policies researcher Xin Ming. The state is poised to increase spending and regain control over health, education and pensions - all areas it retreated from after the launch of market economic reforms in the 1980s. Rural Chinese and laid off urban workers now have to pay school and medical fees out of their own pockets, and helping them financially would be a new way of shoring up eroded support for the leadership and the Communist party.

But Beijing also hopes that by increasing the disposable income of the rural population it can spur more consumption of imported goods and services and thereby address trade imbalances without being pushed into an overly rapid currency revaluation it sees as risky. China's trade surplus is forecast to reach a record US$100 billion this year, triple last year's $32 billion. ''Weak domestic demand will further enlarge the trade surplus, and this is something that we don't want to see,'' China's central bank governor, Zhou Xiaochuan, said in an interview with the Chinese business magazine Caijing.

The Ministry of Commerce has also warned that while the trade surplus has helped expand Chinese foreign exchange reserves and fueled economic growth, it will also have negative effects, including new disputes with China's trade partners and more pressure for revaluation of the currency. The United States believes China keeps its currency, the yuan, artificially undervalued, rendering Chinese goods unfairly cheap on foreign markets. Chinese exports have continued soaring despite Beijing's decision on July 21 to make the yuan about 2% stronger against the dollar and to allow it to float in a restricted margin against a basket of currencies instead of being pegged directly to the US dollar.

Exports have become one of the main engines for China's growth over the last twenty years, prompting economists to warn that the country's economic powerhouse is too dependent on external demand. Recognition of that was evident in Zhou Xiaochuan's remarks to Caijing that ''in the major global economies, the influence of domestic consumption on the trade balance is far greater that of foreign-exchange rate adjustments.''

By pledging to boost domestic demand and thereby generate need for imports, Beijing might have also succeeded in averting being labeled a ''currency manipulator'' in an upcoming report of the US administration. Should the US Treasury Department accuse China of currency manipulation, it could pave the way for imposing trade sanctions in the future.

(Inter Press Service)

New 5-year plan called 'revolutionary' (Oct 13, '05)

China at less than full speed (Oct 11, '05)

Wealth gap may slow economy; unrest unlikely  (Jul 21, '04)

What Snow in Beijing means for gold (Sep 19, '03)


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