China Growth Outpaces Reform

Surging investment hinders government plans to boost the role of consumer spending in the economy.
Michael Lelyveld
2011.01.31
consumer305.jpg Women shop for bracelets in Beijing, Jan. 20, 2011.
AFP

Investment in China soared to record highs last year, casting doubt on pledges to shift the economy to a new basis of growth.

For years, China's leaders have vowed to reduce the economy's reliance on massive investment, advancing the role of consumption instead.

Top officials have repeatedly called the country's investment in construction-led growth "unsustainable."

At last year's World Economic Forum in Davos, Switzerland, Vice Premier Li Keqiang said the economy was "excessively reliant on investment and exports," state media reported.

And last February, President Hu Jintao said that "transformation of (the) economic development mode brooks no delay."

But official figures for last year show virtually no change from the runaway growth pattern sparked by big projects, vast investments, and cheap loans.

In 2010, fixed-asset investment jumped nearly 24 percent to 27.8 trillion yuan (U.S. $4.2 trillion), the National Bureau of Statistics (NBS) reported. The huge sum is equal to nearly 70 percent of China's GDP.

The NBS noted that the increase was actually less than the 30 percent growth rate in 2009. But with investment up over 60 percent in two years, there are doubts that policy statements have had any effect.

Transition in doubt

"It's not clear that the transition is happening," said Thomas Rawski, a University of Pittsburgh professor of economics and history.

Last year, investment in the high-flying real estate sector led the way, climbing by one-third to over 4.8 trillion yuan (U.S. $733.6 billion). The growth rate doubled from 2009, according to data from the Ministry of Housing and Urban-Rural Development.

Beijing knows that booming investment and construction are linked to a host of China's major problems and policy challenges, Rawski said.

The central government has been struggling with the waste of resources, environmental damage, and low valuation of the yuan, which pressures banks to convert currency and pump out more loans.

"If you look back over the Chinese press and policy statements over the past decade, they're constantly saying we need to reduce the growth of investment and shift resources into consumption," he said.

But entrenched interests make the financing bandwagon hard to stop.

"It's much easier to talk about big structural changes in the economy than to implement them," Rawski said.

Widening gap

Last year, bank lending of 7.95 trillion yuan (U.S. $1.2 trillion) exceeded official limits by 6 percent, while assets rose nearly 20 percent, the People's Bank of China (PBOC) reported.

The government is also increasingly worried about the widening gap between rich and poor, but the investment-led economy promotes greater concentrations of wealth.

Last week, the State Council approved new property taxes in Shanghai and Chongqing on a trial basis to cool the real estate market down.

But much of the push for investment appears to be beyond the central government's control.

"They say they want to limit the growth of investment," said Rawski. "But the local governments are fiercely opposed to this because local officials have built their careers on investment projects they want to carry out during their limited terms of office."

Some backsliding on reforms may have been inevitable because of the government's 4-trillion yuan (U.S. $607 billion) stimulus program, which boosted investment in projects like new rail lines.

Rates 'too high'

But there are also signs that local governments are helping to drive investment and excessive GDP growth, which topped official forecasts at 10.3 percent last year.

The central government has repeatedly warned provinces against setting double-digit growth targets, yet the practice continues. The NBS also regularly reduced provincial GDP data because of inflated reports.

On Jan. 25, the official Xinhua news agency said some local governments have submitted plans for doubling GDP in five years or less.

Zhang Ping, director of the National Development and Reform Commission (NDRC), said most provinces have set their growth rates too high, ignoring environmental, energy, and resource constraints, Xinhua reported.

Higher growth "would undermine both price stability and economic restructuring," NBS chief economist Yao Jinguan said.

But Rawski noted that the central government has also promoted mergers in sectors like steel, coal, and cement. The policy is aimed at improving efficiency, but it may be driving even more investment.

State-owned enterprises have also enjoyed high double- digit growth as traditional recipients of investment and loans. Last year, net profits of centrally administered SOEs surged 40.2 percent, Xinhua said.



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