Economic restructuring or structural adjustment of China's economy has been a hot topic for a long time. The global financial tsunami and the intensifying pressure from other countries on the yuan have made the issue more appealing. Indeed, a major theme for China's forthcoming 12th Five-Year Plan is to accelerate the pace of economic restructuring.

While it relates to the economy at different levels, the first priority for the nation at present is so called macroeconomic restructuring.

More specifically, it means an adjustment of the relative share of final consumption expenditure, gross capital formation, and net exports of goods and services in GDP. The problem with the existing macroeconomic structure is that capital formation and net exports both contribute a much larger share to GDP, while consumption is significantly less than those in most other economies.

According to the National Bureau of Statistics, the percentage of GDP arising from final consumption expenditure, gross capital formation, and net export of goods and services was 48.0 percent, 47.7 percent, and 4.3 percent in 2009 respectively, which compares to 65 to 75 percent, 25 to 35 percent and -5 to 3 percent for most developed economies.

The unusually high share of gross capital formation was a direct result of an unusually fast growth in fixed assets investment over the past few years. It has, however, led to over-investment and in turn over-capacity in many industries, which has not only wasted plenty of resources - it has also intensified market competition, worsened the business environment, hindered industrial upgrading, accumulated non-performing assets and increased banks' credit risk. In fact, curbing over-investment has long been the target of the central government's macroeconomic tightening drive.

But the government also launched a 4 trillion yuan stimulus package to fight the global financial tsunami in 2009, which has inevitably worsened the problem. Now that the financial tsunami is largely behind us, it is time to be more determined in tackling the problem. The unusually high share of capital formation in GDP is not justified, and as a result, it should begin to prudently decline.

As for the high share of net exports, it should be noted that this is the reason why the US and other countries have criticized China - and the criticism is poised to intensify. It is also worth noting that the rapid growth in exports, and in turn the high share of net exports, as observed over the past decades is not sustainable anyway. And given that the yuan is poised to appreciate, trade barriers in many countries against China's exports are set to increase, and competition for exports from other countries with even lower labor costs are bound to intensify in the coming years. Thus the share of net exports to GDP will also be inevitably begin to decline.

Against this backdrop, the share of consumption expenditure is set to rise. More importantly, great efforts should be made by the central government to accelerate the growth of consumption expenditure with a view to maintain high GDP growth as investment and export growth slows. To this end, one of the focuses of the 12th Five-Year Plan is to speed up personal income growth, particularly of the low-to-middle classes, by facilitating faster salary increases and offering more consumption subsidies. This is an important move in terms of rationalizing national income distribution from a social development point of view, and also a critical step for increasing the share of consumption expenditure from the viewpoint of macroeconomic restructuring.

Although the direction of restructuring is undoubtedly correct, the right pace of restructuring is also important and should be well managed. It is argued that the right pace should be a gradual and measured one, given that China is still a developing country.

First, for a developing economy, economic takeoff and development must entail a large-scale of fixed-asset investment, as infrastructure and manufacturing capabilities need to be built up first. Hence over its transition towards a developed economy, it is poised to see fixed-asset investment to outgrow consumption and GDP as a whole. This was true for most economies as they made the transition stages from a developing economy to a developed one, including Japan, South Korea, Taiwan and Singapore, etc. As far as China is currently concerned, while it has achieved remarkable economic growth over the past three decades and has become the second largest economy in the world, it is still in the middle of the transition as its per capita GDP is only $4,000, ranking around 100th in the world. Hence it is still facing vast demand for infrastructure construction and manufacturing build-up, which calls for continued high growth in fixed-asset investment.

Second, while it will inevitably slow down, export growth will remain relatively strong as China still enjoys competitive edges in many aspects against most other countries. Chinese firms as well as government authorities should make tremendous efforts to mitigate the slowdown and maintain export growth as high as realistically possible, rather than conceding the market to others without a fight. It is worth noting that many countries in the world are pushing for export expansion in the current stage. China should also continue to do so, and hence China's exports are expected to continue to grow at rather high levels in the coming years, albeit it at a slower pace than previously.

In view of the above arguments, the central government should work hard to manage the pace of macroeconomic restructuring, that is it should remain in line with the economic reality of China at its present state of development. Too quick a pace of restructuring would not be a good choice.

The author is senior vice president and chief economist/strategist for China Banking CITIC Bank International. The opinions expressed here are entirely his own.

(HK Edition 03/04/2011 page2)