Abandoning GDP fixation

The economic work conference transmitted a significant and unambiguous message that focus will be real economy

Many market observers have said the just-concluded Central Economic Work Conference of the Chinese government placed particular importance on "sound" or "steady" macroeconomic, fiscal and monetary policies in the year ahead.

However, to my mind, the annual top economic conference also transmitted an unambiguous message to the outside world that the country is poised to make some significant economic policy changes.

To promote these policy changes, China will first abandon GDP-dominated performance as the guideline for its economic development. As early as October 2007, in his report delivered to the 17th National Congress of the Communist Party of China, President Hu Jintao vowed to reduce the country's dependence on GDP, saying economic development should aim to improve people's livelihoods and welfare rather than purely push for GDP growth.

However, the country's efforts in this regard were interrupted by the economic stimulus packages it launched amid concerns over an economic slowdown, following the financial crisis in the United States in the latter half of 2008 and the following global economic recession. The side effects of the policy interruption are expected to unfold and to be mended in the years ahead.

Fortunately, the Chinese government did not cling to the GDP-preoccupied economic development approach this time, even though the country still faces the risk of an economic downturn in the context of global economic uncertainties. Despite being encircled by a treacherous external economic environment, the country has shown more determination than ever to shy away from any enormous economic stimulus packages in an endeavor to decelerate its fast pace of GDP growth, as indicated by the circular issued after this year's Central Economic Work Conference. Such a departure from the GDP preoccupation has also been reflected in some open remarks made by the country's top leaders.

The country is also expected to become firmer in extricating itself from its long dependence on currency over-issuance in the next year. For many years, some in China have regarded the virtual economy, or the financial economy, as being the same as the real economy, believing that a fast-growing GDP or the increased wealth on paper - which has proved to be mainly based on credit over-expansion - means fast development of the country's economy. Dominated by such an ideology, the country has shown a serious dependence on currency growth in recent years. Statistics indicate that China's newly increased credit volumes now amount to 8 trillion yuan ($1.26 trillion) every year, eight-fold the average 1 trillion yuan from 1998 to 2002. However, the country's newly increased GDP value has increased less than four times during the same period. Compared with the growth of its real economy, China's monetary supply has witnessed a twisted growth over the past years. For example, the country's bank assets have increased to 110 trillion yuan over the past 10 years, an eight-fold increase that was equal to 2.5 times the GDP in 2010. Such a high ratio between the two indexes has rarely been seen anywhere else. The lion's share of this flood of fluidity has gone to the property market and virtual economy rather than the country's real economy, such as agriculture and small and medium-sized enterprises.

Promising a prudent monetary policy in the year ahead, the country is expected to funnel more monetary supplies into the real economy, such as the construction of irrigation facilities and other infrastructure instead of the real estate sector. This will be a key way to prevent the speculation-prone housing market from continuing to hijack the world's second largest economy. On the contrary, the country is expected to remain unwavering in pressing ahead with ongoing regulations of its realty market to ensure that the still unendurably high property prices return to a reasonable level to meet the demand for accommodation.

This overdue and much-needed emphasis on the real economy will dominate the country's economic policy changes in the year ahead and will also decide domestic industrial adjustments over a longer period.

Such a policy shift from an excessive focus on the financial markets to the real economy is also an indication that China's policymakers have embraced the idea that the financial market can only serve as an auxiliary means to aid the country's real economy.

The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences.

(China Daily 12/29/2011 page8)