[Editor’s note: Chinese premier Wen Jiabao openly stated that China’s economy has showed signs of overheating and would stall the economic reform and development if not properly handled. He has since ordered government entities to take immediate measures to cool down the economy by tightening bank credit and limiting the scale of investment. So far, these measures have not been well executed. They have met tremendous resistance, particularly at the local government level. Below is an excerpt of an article published on a government website on June 14, 2004 by a government economist analyzing the current economic crisis of China. This article is regarded by some analysts as a different voice from the central government resisting Wen’s economic tightening policy.]
Primarily, economic growth is experiencing more and more restraint from lack of natural resource and environmental factors. In the year 2003, the economic growth rate of 9.1% was highly dependent upon the enormous consumption of raw materials. Over the course of the year, China used 260 million tons of steel and steel products, 1.5 billion tons of coal, and 830 million tons of cement, accounting for 25%, 30% and 50% of the world total consumption of each type of raw materials. However, the GDP volume in 2003 is only about 3.9% of the world’s total. This inefficient style of management and production is completely unsustainable.
The second consideration is that there are many imbalances in the current economy. The rate of investment is out of balance with the rate of consumption. In the past few years, the investment remained the main source of growth. If consumption cannot keep up with the investment, over-production will occur in many industries. The ratio of investment was 38% in 2001, 39.4% in 2002, and 45% in 2003. With the rising ratio of investment, the ratio of final consumption has been decreasing. The ratio of final consumption was 59.8% in 2001, 58% in 2002, and 53% in 2003. Our current ratio of investment is about twice the world average, while the ratio of final consumption is 24% lower. One reason for the low level of consumption is that farmers in rural areas don’t have enough disposable income to pay for the consumption expenditures. The second reason is that the widening inequality in the income distribution has been harmful to consumption growth. According to the study of College of Sociology of Tsinghua University, the wealthiest 20% in the country occupy 53% of the national wealth, while the poorest 20% own 3%. While the rich are able to afford goods, they are at the low end of the propensity for consumption. For the poor with a high propensity for consumption, they lack a means of payment. Also, sometimes new reform policies were introduced one after another in a short time frame, resulting in a rapid fluctuation of consumers’ expectations. On the one hand, effective demand and consumption is not sufficient, on the other, the bank’s savings increase rapidly.
Third, the imbalances exist in the industrial structure. China’s agriculture as component of GDP is 11% above the international level, and the tertiary industry is 32% below the international level. The high value tertiary industry, or service sector, has been developing at a very slow pace. Labor force in tertiary industry of developed countries consists of 62.8% of the total employment, while the ratio in China is only 28.6%. The development of tertiary industry not only affects the growth of the economy and prosperity, but also influences the improvement of the living conditions of everyone, and more importantly, affect the rate of unemployment. With the same input into different industries, the effects on job creation will be different. Entrepreneurs should do some studies on the tertiary sector. From the structure of foreign investment, the tertiary sector, especially high value tertiary sectors, has the highest growth rate of foreign investment.
Fourth, the problem with the first quarter economy is due to over-investment in the fixed assets. It has brought about two problems: A) The quantity and pace of money supply and the issuance of credit have not been in control; B) Shortages in the supply of coal, electricity, crude oil, and transportation. The fundamental problem is the excess of fixed assets investments. Currently, China’s economy cannot be summarized as “overheating”. Cooling and heating co-exist in the economy. Some aspects need to be controlled and some aspects need to be expanded. Currently, China’s macroeconomic problems need to be treated according to the specific situation, and should not be handled uniformly nor should the breaks be put on suddenly.
Translated from http://www1.people.com.cn/jingji/1045/2569191.html
Yao Jingyuan, Chief Officer of Economic Administration and Spokesperson of China’s Statistic Bureau.