Chinese economy healthy, with great potential

FRANKFURT - The Chinese economy is healthy and has great potential for further development, a leading German economist has said.

In the macroeconomic sense, the Chinese economy is still extremely healthy if one looks at the growth rate, inflation and balance payments, said Carsten Herrmann-Pillath, research professor of Economics Evolutionary sciences at Witten/Herdecke University in Germany, in a recent interview with Xinhua.

He explained that the Chinese central bank has a lot of freedom to support short term economic growth given the low inflation.

The central bank of China has lowered interest rates and reserve ratio, he added. "So they have a very good management of monetary policy."

Regarding the fiscal system of China in which some say debt level may be a problem, Herrmann-Pillath said, "It's also very healthy compared with western economies and Japan."

Judging by the two standard macroeconomic tools, namely monetary policy and fiscal policy, the "Chinese government has still many ways to support economic growth," he said.

On the slowdown of the growth rate in China, Herrmann-Pillath sees no real reasons to worry. "To certain extent, this slowdown of growth is what the Chinese government wanted to achieve."

The Chinese government wants to change the economic growth model, which means more innovation based on more consumption instead of investment, Herrmann-Pillath said.

He said China wants to keep growth at a lower level while paying more attention to the improvement of people's living standards, and employment.

Herrmann-Pillath said the investment in China used to be very high, which was not sustainable. The Chinese government decided to reduce investment and increase consumption and make consumption a driver of growth. "This is a very good idea and should be done," he said.

Herrmann-Pillath believed that the urbanization will become a driver of economic growth in China for the next 20 years.

There are still many underdeveloped rural areas in China which need transformation. China has good infrastructure and continues to invest in it, which is a very important condition for the development of underdeveloped areas, he asserted.

China still has a very high share of farmers in agriculture, which means there is still a lot of space for structural reforms, according to Herrmann-Pillath. "If you look at economic history, this was a driver of economic growth." He elaborated that people move from the agriculture sector to industry with higher productivity, from sector with lower productivity to sector with higher productivity.

Herrmann-Pillath considers the discussion about middle income trap in China as misleading because of the diversity in China. "It' s totally misleading to analyze China as one big unit."

Some Chinese provinces are bigger than a European country in terms of population, he said, adding that some provinces in China are already beyond middle income trap while some other provinces are less developed.

Skilled people are needed in order to exploit the opportunities of growth, Herrmann-Pillath said, suggesting China make efforts to give a big push to its education system.