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Crisis Focus
Special
UPDATED: March 6, 2010 NO. 10 MARCH 11, 2010
Ensuring Economic Health
 
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Though China's economy is breathing a sigh of relief after several nervous months, it is still not time to sit back and relax. Much needs to be done to ensure the sustainability of growth momentum. Guo Tianyong, Director of the Research Center of the China Banking Industry of the Central University of Finance and Economics, discussed this issue in an article recently published in the Shanghai Securities Journal. Edited excerpts follow:

With the consumer price index (CPI) increasing and asset prices spiraling out of control, anti-inflation measures are already in the pipeline. The two hikes in the reserve requirement ratio earlier this year have only added to the expectations.

But the job of policymakers in 2010 will be far more complicated than just tightening policies. In addition to massive investments, the Chinese economy still lacks an alternative growth engine. While clouds gather over the profitability of private enterprises, it remains to be seen whether consumption and export can pick up steam. So efforts are needed to adjust the economy and lay the groundwork for sustainable growth.

The GDP grew 8.2 percent in the last quarter of 2009 month on month, a steep slowdown from 16 percent in the April-June period. Such instability has cast an ominous shadow over future prospect.

That is not the only thing starting to worry economists—the side effects of the monetary expansions are increasingly being felt. Both the CPI and PPI (producer price index) have staged significant increases in the past few months, indicating rising pressures on product prices. The explosion in the property markets, in particular, has sent out a clear signal that inflation is coming roaring back.

Another conundrum lies in the private sector—an overall dim spot on the economic landscape. In striking contrast to expansions of their state-owned counterparts, many private businesses are losing their shine after receiving a blow from the economic downturn. This will surely undermine the strength of the economy given the sector's remarkable contributions to job creation.

The government stimulus packages have put a floor under the economy, but the country still faces an uphill battle to foster a new source of growth. It is therefore imperative now for the policymakers to precipitate a rebalancing of the economy, including shoring up consumption and attracting private capital into more innovative sectors with higher added value.

First, it is necessary to allow private investors into state-controlled sectors and put them on equal footing in competition with state companies. A private economic boom would surely be a big help for employment and economic rebalancing. Support measures are also needed to push forward modern service sectors, the financial industry and hi-tech industries.

Second, China must commit to improving its social security network. This will add powerful incentives for consumers who have traditionally saved every penny they could for future emergencies.

Third, there is the growing need to strengthen public services and social systems such as compulsory education, vocational education, health care and pensions. The underdeveloped rural areas, in particular, also need more government support in terms of social welfare development.



 
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