Growth Model Tough to Revamp

China's leaders appear unprepared to implement sweeping changes to economy.
By Michael Lelyveld
2011-02-21
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Chinese workers stitch clothes for export in eastern China's Anhui province, Oct. 12, 2010.
Chinese workers stitch clothes for export in eastern China's Anhui province, Oct. 12, 2010.
AFP
China's plans to change its economic growth model will be difficult to achieve, experts say.

In recent months, the government has raised expectations it will take steps to shift China's economy from rapid investment and export-led growth toward more moderate expansion this year.

Efforts to boost domestic consumption are believed to be a major theme of the 12th Five-Year Plan to be presented to the National People's Congress (NPC) in March.

In December, the official Xinhua news agency previewed the plan, citing China's "challenging task in transforming its economic growth mode" and calling for "sustainable economic
development."

In January, Premier Wen Jiabao praised the economy's progress but said it still faces "prominent problems, including imbalanced, uncoordinated and unsustainable development."

On Saturday, President Hu Jintao used the same words, warning that the problems "might harm the harmony and stability of the society."

Doubt

But analysts doubt the government's will or ability to reshape China's growth pattern, driven by a 23.8-percent jump in fixed-asset investment and a 33.2-percent surge in property development last year.

"I think the momentum is so powerful right now that moving away from that is going to be incredibly difficult," said David Bachman, a China studies professor at University of Washington in Seattle.

"I think it's going to be very hard over the next five years to really change much of anything," Bachman said.

Despite rising prices and a growing wealth gap, officials have sent a series of mixed signals on the growth issue in the runup to the NPC session.

In January, Zhang Ping, director of the National Development and Reform Commission (NDRC), warned that most provinces have set their 2011-2015 growth targets too high to protect the environment and conserve energy.

The National Bureau of Statistics (NBS) also cited inflation concerns in calling for moderation of double-digit growth goals.

Strong growth

But this month, China Business News could only point to three provinces that have lowered their targets from rates of the previous five years. Guangdong, Jiangsu and Shandong provinces are still expecting strong annual growth rates of 8-10 percent.

Coastal Zhejiang province is also planning on an 8-percent rate after average annual growth of 11.8 percent since 2006, the official English-language China Daily said.

At the national level, China's GDP growth overshot government estimates, hitting 10.3 percent last year.

Major cities are feeling the strains of runaway expansion, but few seem to be considering fundamental change.

Beijing may be an exception. The capital city's draft five-year plan calls for "measures to regulate population," noting that it has already grown beyond its 2020 target of 18 million to 19.7 million by the end of 2009.

The city has stunned local auto dealers by slapping limits on new car registrations in January to deal with stifling traffic jams. The move may cut annual sales by 60 billion yuan ($9.1 billion), Xinhua said.

But the results of new property taxes to rein in the real estate sector have been mixed.

Reports suggest that the new taxes in selected cities have touched off another speculative rush to invest before the measures take effect, hindering efforts to make housing more affordable.

Illegal land use for projects has been "rampant" in Shanghai, as well as Zhejiang and Fujian provinces, China Daily said.

'No signs'

Bachman questioned whether the government is committed to ending the incentives for officials to promote investment and export growth.

"There are no signs that they're really making the kinds of operational or administrative changes that would be needed for change to a more consumption-oriented strategy," he said.

The effects go far beyond China, particularly now that the economy has surpassed Japan to become the world's second-largest economy.

World energy and commodity prices may be more responsive than ever to China's demand and output of materials for construction-related industries, like steel, aluminum and cement.

Nearly half of the world's growth in oil demand will come from China in the next five years, according to the Paris-based International Energy Agency.

"Certainly, there are enormous consequences," said Bachman, pointing particularly to China's exports, which rose over 31 percent last year.

"If China thinks that it's going to be able to continue to export like it has, I think they're going to run into some pretty hard constraints pretty fast with the United States and the European Union about imports," he said.

Export push

In the United States, China's currency policy has led to renewed calls for legislation to counter its export push.

But Bachman said China's decision to fight inflation by hiking interest rates instead of the value of the yuan suggests it will put more pressure on consumers than on exporters.

Derek Scissors, Asia research fellow at the Heritage Foundation in Washington, is doubtful the government will make significant changes to its growth model during the coming five-year period.

"It's possible. It's just going to be painful, and that's where the credibility is missing," said Scissors.

"China is addicted almost to high growth. The provinces certainly are, in reporting their political successes," he said. "A lot of people around the country are addicted to rapid public investment growth."

Scissors said China's leaders are unlikely to challenge entrenched interests that have profited from double-digit rates of investment and exports.

"It's going to hurt large state-owned enterprises, it's going to hurt a whole set of sectors that benefit from a lot of public investment, and it's not clear that China has the political will to do it," he said. "I don't think we can expect anything useful from the current government."

Scissors also warned against reading anything into the slightly lower growth goals that have been set by some provinces, citing problems with reporting that have been repeatedly acknowledged by the NBS.

"The provinces don't tell the truth about their economic performance now, so why would we think if they set lower growth targets that they'll be telling the truth about their economic performance then?" he said.

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