China should improve the quality of growth by cultivating new forces, not by adopting short-term stimulus measures

Some foreign media have predicted that the downward economic momentum will prompt the government to loosen its macroeconomic policies, work out stimulus measures and follow on the heels of other countries by cutting interest rates.

Such a prediction is based on misjudgments about China's ongoing economic conditions and thus is unlikely to come true.

The biggest problem facing China's economy is not a shortage in its monetary supplies, but insufficient effective investment demand. A large volume of money China's central bank has issued over the past years has caused huge fluidity. Statistics indicate that the country's household deposits rose to 41 trillion yuan ($6,683 billion) at the end of 2012, an increase of 27 trillion yuan from the 14 trillion yuan in 2007. Such colossal household deposits, along with huge volumes of financial products issued by domestic financial agencies and a drastic rise in China's local government debt, will cause excessive fluidity if not properly handled. In particular, the quantitative easing policy the US Federal Reserve and central banks in European countries and Japan have raced to adopt has exacerbated global fluidity and exerted growing pressures on China because of the influx of hot money. Under these circumstances, China should make a correct judgment about its economic situation and refrain from using a monetary easing policy to spur economic growth, because any move toward this end will aggravate its huge fluidity and increase its financial risks.

China's economy is neither in a state of crisis nor on the road to a struggling recovery, as the outside world claims. The world's second-largest economy has come to a stage that is distinct from the development stages it has experienced over the past decades. Hence, decision-makers should look at China's economic deceleration over the past year from a new perspective to avoid any misjudgments about its economic situation and thus making wrong decisions.

China's 7.7 percent economic growth year-on-year in the first quarter is slower than the average two-digit growth over the previous 30 years, but such deceleration is not a direct result of the international financial crisis. Instead, it is an inevitable result of the fact that a country's economy cannot maintain high-speed growth forever.

China no longer enjoys the advantages that have enabled its high-pace economic growth over the past decades. Enormous changes have taken place and it hasn't the external and internal dividends to bolster a fast-growing economy. Trade surplus has contributed much to China's gross domestic product growth over the past decades. However, it has had a negative contribution to China's GDP in the last three years. The declining advantage in labor costs and the policy of putting domestic oil prices in line with the international market have resulted in a considerable rise in China's manufacturing costs. These, together with other factors, have put a brake on the country's economic growth.

The ongoing changes in its industrial structure also make it impossible for China to maintain high-speed economic growth. After three decades of extensive economic development, production overcapacity, low added value and low technological content have become more obvious in some sectors, which, along with ever-growing environment and resources hindrances, will be a drag on the growth of their effective investment. China's industrial structural adjustment and its failure to find new effective investment demand to make up a considerable decline in its old investment demand have made an economic slowdown inevitable.

But despite the sizeable decline in its economic growth rate, China has not experienced large-scale unemployment, persuasive proof that the country's slowed economic pace conforms to economic law.

China should hammer home the knowledge that the pursuit of an excessively high economic growth through adopting temporary stimulus measures is against economic law. The country should realize that maintaining a stable monetary supply and avoiding the use of short-term policies to stimulate faster economic growth are particularly important ways to maintain financial stability and hedge against financial risks. Without a rise in its effective investment demand, increased monetary supplies alone will not promote a sound development of the national economy. On the contrary, it will only add more fluidity and financial risks.

China's decision-makers should be also aware that refraining from adopting short-term stimulus measures does not mean policy inaction. Although China's economic deceleration conforms to economic law, that does not mean that its current input and output ratio and its current economic growth structure are reasonable, or guarantee that the country's current economic growth rate, although slower to some extent than before, can be sustained in the years ahead. Although no short-term stimulus measures have been worked out, the issue of the country's huge fluidity has not been resolved.

China should shift its policy resources to the creation of effective investment demand and guide huge volumes of non-governmental capital to participate in effective economic activities. A series of measures recently taken by the government, from reducing or delegating to lower-level departments administrative approval power and opening some railway construction projects to private capital, as well as expanding the practice of turning business tax to value-added tax and extending the period of tax exemption for some small and medium-sized enterprises, are steps in this direction and will play a constructive role in improving the country's economic operation.

But what China urgently needs to do is to improve the quality of its economic growth, give non-governmental capital more room to maneuver, and increase efforts to cultivate forces that can help sustain its economic growth instead of the adoption of short-term stimulus measures or a looser monetary policy.

The author is chief economist with Galaxy Securities.

(China Daily 06/15/2013 page5)