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UPDATED: November 7, 2013 NO. 43 OCTOBER 24, 2013
Is the Current Rebound Sustainable?
China's economy faces the twin challenges of realizing efficiency and achieving strong growth momentum
By Lan Xinzhen

The State Information Center, a government think tank, has given three explanations. First, the slow growth of incomes. Incomes for urban and rural residents grew at a pace slower than that of the GDP. In addition, structural unemployment kept deteriorating. Second, the tight financing of infrastructure construction. Given the poor assessment of government debt by the National Audit Office, local government financing platforms are being squeezed. Furthermore, rising financing costs resulted in dwindling credit demand, while falling profits led to a fund shortage and a declining ability to repay debt, which has and will restrain investment in major projects. Third, the rapid appreciation of the yuan undermined export competitiveness. From January to September, the real effective exchange rate rose 6.29 percent. As the dollar gains strength, the yuan is likely to appreciate in the days to come. Considering the weak demand from overseas markets and the dramatic depreciation of other currencies, the real effective exchange rate of the yuan will exert a significant influence on export growth.

Niu Li, a senior economist with the State Information Center, said overcapacity also cramped the development of the manufacturing industry and momentum for a strong economic rebound. Mounting idle production capacity has become a stumbling block for economic growth and the ability for enterprises to upgrade their development model toward more efficient and higher end goods.

"Now, investment in industries that are already harassed by overcapacity is still on the rise," said Niu. "It's becoming increasingly difficult to tackle the problem."

Moreover, the rise of the consumer price index (CPI) has likely had an impact on economic development. In September, the CPI rose by 3.1 percent. The central bank may tighten its currency policy to avoid inflation, while a subsequent liquidity shortage may affect the production and operation of some enterprises. Though the exit of quantitative easing policies by the United States was postponed, it will take place sooner or later. Therefore, China's economy is under threat by an appreciating U.S. dollar, gloomy financial markets and rising borrowing costs.

Economic restructuring

The slowdown of China's economy was initially triggered by the 2008 global financial crisis. Since the unveiling of the 4-trillion-yuan ($586-million) stimulus package initiated in 2008, China's economy has regained some vigor. In 2010, China's GDP regained double-digit growth.

To maintain healthy and sustainable economic development, the Chinese Government has worked to transform the country's economic growth model and upgrade the industrial structure. This year, focus has been laid on eliminating overcapacity, expanding domestic demand and developing strategic emerging industries. To accomplish this, China has to suffer the throes of transition because restructured enterprises have yet to yield profits while older enterprises are seeing decreasing profits.

"The slowdown is an inevitable result of economic restructuring, and it's predicable and controllable," said Li Huiyong, an analyst at Shenyin & Wanguo, a securities company based in Shanghai.

To double its 2010 GDP in 2020, China only needs to keep growth hovering above 7 percent. However, to achieve long-term sustainable development, China has decided to slow its economic expansion to carry out structural reforms. Rebound during this past quarter is an indication that the 7.5 percent growth rate in the second quarter may have been the Chinese economy hitting rock bottom.

Nevertheless, the rapid rebound of energy-intensive industries has put great pressure on economic restructuring. In the third quarter, China witnessed a rebound in investment, consumption, exports and the manufacturing industry in particular, which saw its growth rate of industrial added-value jumping from 8.9 percent in June to 10.2 percent in September.

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