Sights set on growth quality

Domestically, the fast GDP growth over the past decade has been fuelled to a large extent by a nationwide real estate boom and rocketing property prices. To free itself from a growth path dependent on the soaring prices of real estate, China needs a complete overhaul of a GDP growth model fuelled by high housing prices. The soaring housing prices have caused the central government to launch harsher-than-ever real estate regulations. However, some local governments have never abandoned their attempts to loosen the housing regulations, because of their reluctance to really disable their housing-dependent fiscal revenues and their desire to maintain economic growth.

But loosening the country's real estate regulations will inevitably nullify efforts to reduce or eradicate overcapacity in such related industries as mining, steel and iron, and construction materials.

China's ongoing housing de-inventory efforts in second and third-tier cities are far from over, as indicated by the meager 1.2 percent growth year-on-year in its housing sales from January to November. Worse, a negative housing sales growth in Beijing and Shanghai and other first-tier cities last year is now spreading to some second and third-tier cities. If China's housing de-inventory efforts cannot make progress, the risk of a systematic financial crisis triggered by housing bubbles will grow.

It is expected the country's new leadership will strengthen efforts to eradicate housing bubbles and thus consequently further lower its GDP growth target. The reason is that lower GDP growth will help the country forestall potential risks and reduce their negative impacts on the national economy to a minimum.

China's fast-growing economy over the past decade is also the result of investment rather than its efforts to raise efficiency and productivity through technological progress or institutional reforms. This is one of the main reasons why China's current marginal capital output ratio declined from 2.4-to-1 in 2000 to 6-to-1 in 2010. The declining marginal capital output ratio means a narrowing space for the use of investment to drive economic growth.

China's new leaders will go all out to change such an unbalanced economic structure and pursue higher quality growth.

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

(China Daily 12/07/2012 page8)