The State should grasp the chance to deepen its market-oriented reforms, urged experts at a recent seminar held by Beijing Unirule Institute of Economics.

The country notched a typically robust growth rate in the first six months of the year while most economies across Asia were limping badly, hobbled by the slowdown in demand from the United States.

Official figures indicated that gross domestic product (GDP) grew by 7.9 percent to 4,294 billion yuan (US$518 billion) in the first half of the year. In the second quarter of this year, China's GDP grew by 7.8 percent, slightly slower than the first-quarter growth of 8.1 percent.

The latest growth rate reflected a steadily slowing trend this year, according to a report from the Unirule Institute of Economics.

To oil the domestic growth engine, the government has injected money into the economy by spending heavily on public works projects and pushing total investment in fixed assets in the first half up 15.1 percent to 1.19 trillion yuan (US$143 billion).

Domestic consumption was moderately brisk, growing by 10.3 percent in the period.

On the other hand, the dim external economic climate has led to a cooling of Chinese exports.

Exports fell 0.6 percent year on year in June, the first decline in two years. In the first half, exports rose by 8.8 per cent year on year, well off from last year's blistering 27.8 percent.

The world economic slowdown has greatly weighed down China's export growth and could affect the overall economic growth in the second half of the year.

However, China has made remarkable achievements in absorbing foreign investment.

The country approved 11,973 new foreign-funded enterprises in the first half year. Contracted and actual foreign investment reached US$33.4 billion and US$21 billion, respectively, increasing by 38.2 percent and 20.5 per cent from the same period last year.

"This acceleration in utilizing foreign funds is because, first of all, the Chinese economy, in essence, is a huge one," said Zhang Shuguang, a senior economist with the Unirule Institute.

Unlike other emerging markets in Asia, the Chinese economy has been successfully shifting from export-led growth to domestic-led growth to maintain its momentum and make itself more attractive to foreign investors.

Domestic demand was said to have contributed about 93 percent to the GDP growth.

Since the government has been funding infrastructure construction with money from issuing treasury bonds over the past three years, demand for investment has increased.

Rapid housing reform is increasingly turning urban Chinese into the owners of their homes, with investment in property driving growth in fixed asset investment in the first half of the year.

As much as 230 billion yuan (US$27.7 billion) in investment has been realized in the nation's property sector during January to May this year, up 20 percent on a year-on-year basis.

A likely new spending spree by urban residents would fuel steadily growing demand in the country. Therefore, GDP growth in the second half of the year could at least reach 7.3 percent, Zhang predicted.

Such moderately fast growth will certainly help tilt the balance in China's favour as international investors face a global slowdown.

The country has also bettered its investment environment for foreign businesses by amending laws related to foreign-funded companies and relaxing restrictions in terms of investment scope and geographic regions, according to Zhang.

China has been furiously promoting competition. In service sectors like retail, telecom, banks and tourism, China has been steadily encouraging more foreign and domestic competition, a policy accelerated by China's pending entry into the World Trade Organization. This has made the country more friendly to direct investment from overseas and thus brought growth powered by rising efficiency.

The rapid growth of overseas investment will, to a certain extent, offset the negative effect of the decrease in exports, noted Zhang.

It is estimated that an increase of one percentage point in overseas direct investment will bring 0.3-0.4 percentage points in GDP growth.

"With Beijing's winning the bid to host the 2008 Olympic Games and China's expected entry to the WTO, all foreseeable shocks have been removed," said Zhong Wei, an economist with Beijing Normal University.

"A growth rate of 7-8 per cent will well serve the country's institutional reforms," held Zhong.

Though the huge potential of domestic demand can be further tapped, factors hindering development have yet to be addressed.

Four major challenges the country faces, as Zhong suggests, are fiscal reform, risk-control of the stock market, reform of State-owned enterprises and the growing income gap.

Some experts point to an adjustment of the pro-active fiscal policy as market-led private investment is now taking off.

"It will take at least two or three years for the government to phase out the pro-active fiscal policy," said Jia Kang, deputy director of the Institute of Fiscal Science under the Ministry of Finance.

Over time, the government will gradually cut down the size of its issuance of bonds.

"In the short term, the process will largely be determined by the condition of the country's exports, investment and institutional reforms," said Jia.

Jia warned that a drop in exports, sluggish private investment and more delays in institutional reforms would postpone the phase-out.

(China Daily 08/06/2001)