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Looking for new economic powerhouses

By You Nuo (China Daily)
Updated: 2009-03-23 07:43

One effect of globalization is that in troubling times, like now, people ask each other about conditions in different countries.

Fact-finding trips tend to increase when press reports, stock market indexes and government targets fail to tell the whole story.

Can China manage to achieve its GDP growth target this year?

If it can - then how?

Or if things are so bad, in regard to exports and domestic demand, that China is forced to lower its expectation, how low can it go?

On the part of the government, if discouraging data emerges in, say, the middle of the year, will China be able to take further action? And what is it likely to be?

These are questions that Chinese economists frequently face when meeting with visitors from overseas.

Indeed, there are no ready answers. But first, let's have a look at what is actually taking place.

We know the government's stimulus plan is working, because banks have been scrambling for the large new loan projects in infrastructure development.

Beijing has budgeted 4 trillion yuan (a little less than $600 billion) for the next couple of years, in which more than 1 trillion yuan will come directly from the central government. Provincial governments are proposing more.

In comparison with fiscal stimulus, it is still not clear how the other two engines of the economy, domestic consumption and overseas trade, will contribute.

A general impression is that overseas trade can hardly be counted on after its net decline since the last months of 2008. If the downward trend can be reversed in the middle of 2009 and begin to pick up in the fourth quarter, which I think is likely, the whole year's trade record can at best end up with some very mild increase, and won't contribute much to GDP growth.

Nor is there good news in domestic consumption. Retail growth in the first two months of 2009, in year-on-year terms, was 15.2 percent, lower than last year's 21.9 percent growth. Even after inflation is considered, growth in the first two months was still weaker.

In fact, retail growth has been on the decline since July 2008, when its year-on-year growth peaked at 23.3 percent. All factors considered, it would be great if China could maintain its annual growth in retail above 15 percent.

In the meantime, fiscal spending will remain the main buffer for the crisis' social impact.

It is expected to work in three ways - an increase in the government's grain procurement price to help farmers, especially those households with members who have lost their jobs in the cities; an increase in social security support in the cities; and a costly reform of the medical system that the central government is expected to roll out later this year.

Comparing the above factors with the situation in 1998, during the Asian financial turmoil, China has some new advantages and new difficulties.

One advantage is that, to start with, few financial institutions with troubled assets have failed.

The second advantage comes from much stronger government coffers. As Premier Wen Jiabao told reporters recently, Beijing has ample stocks of ammunition, or fiscal means, that can be used for stimulus purposes.

On the downside, one new difficulty is easy to discern: The Americans and the rest of the world are no longer buying. So to export one's way out of the crisis is not an option.

There is a second and more daunting difficulty - as to how to sustain growth by relying, almost entirely, on domestic consumption. Urban housing development helped China to maintain growth during the last crisis, which was followed by rising sales of automobiles.

But it is unfortunate that, partly because of bubbling urban housing prices in the past years, property development is no longer acting as a major economic powerhouse.

Can China make its housing industry and urban construction a locomotive for domestic consumption? If not, which industry (or industries) can step up? These remain the crucial questions to be answered later this year and next.

E-mail: younuo@chinadaily.com.cn