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UPDATED: June 9, 2009 NO. 23 JUNE 11, 2009
Growth Is Not Everything

China is feeling relieved as the economy shows signs of rapid recovery. But with the downturn receding, another problem appears--the return of boom times may mask the urgent need to shift the economy away from exports and investments and rely more on domestic consumption. Li Yining, a renowned economist with Peking University, discussed this issue in an interview with People's Daily Overseas Edition. Edited excerpts follow:

The widely held belief in China's economic turnaround is based on a drip-feed of ordinary economic figures like GDP growth rate. But I believe a more convincing outlook on economic direction would need further proof from the four basic indicators, namely electricity consumption, container turnover in ports, truck traffic on roads and vacancy rates at plants.

For a country like China that has a solid fiscal capacity, it is not difficult to restart the stalled growth engine. As the country expected, heavy government investments are feeding an upward spiral in a number of industries. But the remaining headache is that growth restoration does not necessarily precipitate economic rebalancing. Instead, it may hide the underlying imbalance that poses a potential threat to future development.

The call for a healthier economic structure has been growing over the past several years, even as the economy continued to chug along at double-digit growth rates. But much was said with little done. The overwhelming economic boom delayed structural adjustments, sowing seeds of the current gloom.

A deeper look at the risks of the imbalance could explain why economic restructuring is so important for China. Without adequate rebalancing efforts put in place, the economy may travel a "W-shaped" route over the next few years and suffer from two unintended consequences. The first is inflation, which will force banks to hold back credit distribution, thus choking growth momentum. The second is overcapacity in some industries, which squeezes the room for further investment.

The good news is that the policymakers are increasingly recognizing the need for more rebalancing efforts, technological innovation in particular.

Investment safety

It's true that healing our economic woes requires fostering a stronger consumer market. But this should not overshadow the significant role of investment. Moreover, the consumption increase could also provide a bigger market to absorb more investment.

In a volatile economic environment, it is now necessary to pay heed to emerging investment risks from both domestic and overseas businesses. For example, it is possible that some Chinese exporters default on their bank loans because their struggling foreign buyers delay trade settlement. Domestically, the outpouring of bank financing for investments, especially those long-term infrastructure projects, also gives rise to financial risks.

To ensure a safe and reliable investment environment, the country is supposed to improve its bankruptcy system and lower the execution costs of laws that enforce debt repayment. In addition, commercial banks should take a prudent approach to loan distribution and tighten auditing.

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