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The prospect of a China-centric rebound

By Zhu Qiwen (China Daily)
Updated: 2009-06-29 07:51

High hopes of China's stronger-than-expected recovery are giving rise to speculation whether this fast-growing developing economy can possibly take the driver's seat to steer the world economy out of the current crisis.

Midway through this year, there is already talk in the country that growth of gross domestic production has accelerated from 6.1 percent in the first quarter to about 8 percent in the second quarter, putting the economy on a comfortable track to reach the full-year target of 8 percent.

Such optimism is not confined to observers at home. International organizations, despite their differences over the prospect of developed economies, find it easier to agree on a brighter growth outlook for China.

Last Monday, based on a prediction that total GDP for high-income countries will shrink by 4.2 percent, the World Bank cut its 2009 global growth forecast to a 2.9 percent global contraction. That is a sharp reduction from its March prediction of a 1.7 percent global contraction, the worst on record it then thought.

To make it confusing, one day later, the Organization for Economic Cooperation and Development, the club of rich economies, revised upward its previous projections for member-economies for the first time in two years.

In spite of increasing signs of "green shoots" in developed countries, such conflicting views highlight the difficulties for the international community to confirm the light at the end of tunnel for the richer, developed economies. However, both the World Bank and the OECD have recognized the strong momentum of China's recovery and made it a case to anticipate the return of global growth. Hence, is a China-led global recovery a foregone conclusion now?

The answer is a big "No" though China's economy can grow by more than 8 percent this year.

The reason is simple. The Chinese economy is bouncing back more strongly than others because of turbo-charged investment growth supported by a 4-trillion-yuan (US$586 billion) government stimulus package and record bank loan growth so far this year. The investment boom helps a lot in maintaining fast growth for the moment, but does little to enable the structural change necessary for balancing growth. By merely manufacturing more and exporting more, Chinese domestic growth cannot become a key driver of global growth. However, does China's economic growth have a chance to be the savior of the global economy in the not-too-distant future?

The fact that the Chinese government has taken unprecedented measures to boost consumption indicates that the answer might be more encouraging than expected.

As a proportion of the national economy, China's private consumption fell steadily from 46 percent of the GDP in 2000 to 35 percent last year, thanks to much faster investment and export growth. Insufficient consumption growth has hindered China's change of growth model, but the room for improvement provides policymakers a great opportunity.

A 15-percent growth of retail sales in the first five months of this year - better than in most of the earlier boom years - shows that Chinese officials have finally found the way to encourage the 1.3 billion Chinese people to open their wallets.

Tax cuts and subsidies for consumers are working their magic. The most impressive case is the burst of new-car purchases in China. Despite the ongoing global recession, sales of cars soared by a stunning 54.7 percent year-on-year in May. It is hard to explain the windfall for automakers, who are trying to raise their output in a hurry nowadays. The importance of a sweeping tax cut for car purchase at the beginning of this year can never be over-emphasized.

On the other hand, the Chinese government has been making big strides on improving the social safety net to shore up public confidence in their future.

About ten days ago, the central government decided to transfer State-owned shares from listed companies to expand the all-important national social security fund. The plan will lessen the public's worry about their under-funded pension accounts.

Last week, a government-funded rural social pension system was announced for 10 percent of the counties. It aims to narrow the urban-rural social welfare gap as well as boost rural consumption.

The long-term benefits of these measures are immeasurable. And, their successful implementation may considerably increase China's chance to emerge as a growth engine for sustainable global recovery.