Hu Shaowei

 

The postponement of the release of economic data for the first quarter set off wide suppositions.

 

As a result, many expect the macroeconomic readjustment policies will be intensified. Even the possibility of putting a brake on the economy is not being ruled out. These assumptions led to the stock market drop on April 19.

 

However, after reading the data released by the National Bureau of Statistics, I believe the market's expectation of stronger macroeconomic readjustment went a bit awry.

 

The macroeconomic policies can be expected to be maintained. The challenge is to carry out the State's economic policies to the letter.

 

Actually, although economic growth is showing signs of increasing a bit too fast, it is not overheating.

 

Take the two indicators people are most concerned about - investment in fixed assets and the consumer price index (CPI).

 

In the first quarter, total fixed asset investment stood at 1.75 trillion yuan (US$219.1 billion), 23.7 percent annual growth. Of this, fixed asset investment in urban areas and townships was 1.45 trillion yuan (US$181.8 billion), a 25.3 percent rise over the same period last year.

 

The CPI rose by 2.7 percent in the first quarter year-on-year, which indicates the possibility of inflation.

 

But if the factors of the lingering influence of last year's food price hikes is excluded from the calculation, the CPI rose by only 1.2 percent in the first quarter, the same as the previous year.

 

Moreover, when the factors of food and energy are deducted from the calculation according to international conventions, the CPI rose by only 0.9 percent.

 

In addition, some encouraging changes have taken place in the economic structure in the context of rapid economic development. For example, the portion of the service industry in the GDP rose by large margins and consumer demand increased rapidly.

 

Over all, the economic situation is still in the bracket of normality.

 

But the inherent problems in the operation of the economy remain unresolved. For example, investment is growing a bit too fast; bank loans are rising a bit too much; and favorable trade balances are a bit too big. All these are factors that could trigger the overheating of the economy.

 

What is worth attention is that high energy-consuming projects are showing signs of rebounding, against the background of strains on the electricity supply having been basically relieved. This indicates that environmental damage is still being done and the strengthening of macroeconomic readjustments are called for.

 

In fact, the State has formulated a package of policies to address the problems cropping up in economic development, particularly those involving upgrading industrial structure, saving energy and reducing waste discharges along with issues concerning the livelihood and well-being of the public.

 

However, these policies have so far failed to work effectively. The crux of the problem is that these policies have yet to be fleshed out in detail and have yet to be adequately enforced.

 

In recent years the central authorities' policies failed to be implemented in some localities. For example, the central government strongly advocates saving energy and reducing waste discharges but 14 provinces have found ways to offer preferential electricity prices to high energy-consuming businesses in an effort to boost local economic growth.

 

Similarly, large apartments are the main targets of the Construction Ministry in its bid to keep down soaring real estate price. Defying the repeated stress to cut down on construction of large apartments, property developers in various localities continued business as usual. In the first quarter, for instance, investment in apartments of 90 square meters or smaller comprised merely 16 percent of total real estate development.

 

In view of this, policy enforcement mechanisms need to be introduced involving many factors such as law and ethical codes, in addition to the printed policies, rules and regulations.

 

Capital's excessive volatility constitutes another factor.

 

Although it is only natural that capital flows from the banks into the capital market in pursuit of profits, money's excessive volatility serves to fan the price rises on the stock market, which means that too much capital chases after scarce resources.

 

This is a matter of the central bank convincing investors that they should re-evaluate their investment behavior rather than a matter of the central bank's getting directly involved in reducing capital's volatility. A combination of measures needs to be launched, involving working out ways to reduce volatility and sending out signals of volatility reduction.

 

Taking into account the inherent dislocations in the Chinese economy and the country's weak foundation for sustainable economic development, the pace of institutional buildup and economic infrastructure reform need to be quickened. This should be undertaken along with short-term macroeconomic coordination.

 

First, a pricing mechanism, which is based on the supply and demand for resources and on the cost of tackling environmental pollution from production needs to be introduced.

 

Second, the income and distribution systems need to be reformed. This means that the government ought to play a greater role in the fields of education and healthcare to introduce a sound national social security system.

 

Third, monopoly on profitable sectors should be done away with and competition promoted. Sector monopoly and incomplete competition lead to price distortion. Unreasonable price hikes, in turn, have a negative influence on industrial-structure readjustment and even on the government's effort to transform the mode of economic growth.

 

The author is an economist with the State Information Center

 

(China Daily April 25, 2007)