Liu Shijin

I. Rapid and Sustainable Economic Growth Requires the Push of Fast-Growing Industries.

Since the beginning of reform and opening up, China’s economy has maintained a general trend of rapid growth. From an industrial perspective, this rapid growth is directly related to the fast-growing industries at different stages. In the early and middle years of the 1980s, the fast-growing industries that played a driving role were mainly light industry, textile industry and other industries. After the adjustment in the late 1980s, the economy began a new round of rapid growth as from 1992. During this period, the fast-growing industries were mainly infrastructure, basic industry, new-generation household appliance and real estate.

In retrospect, even though these fast-growing industries had many problems at the time, including inflation, bubble economy and other serious problems, there was successful experience in at least two areas. Firstly, these industries responded to and spurred the most extensive and urgent consumer demand and therefore created conditions for a thriving market demand. Secondly, as industrial access threshold was relatively low and the market was relatively open, various components of the economy could enter into fierce competition and become full of vitality.

The economic growth slowed down as from 1998. The Asian financial crisis is an important external factor. But to a major country that mainly relied on domestic demand, the problem was mainly with internal factors. There have been many explanations about the causes of the slowing economic growth. From the angle of industrial changes, the slowdown can be interpreted as a visible decline of the roles of the industries that registered rapid growth in the early 1990s. As a result, there was a need to find a new group of fast-growing industries to push forward the growth of the economy. China is in the middle period of industrialization. Economic theories, international experience and our country’s own practical conditions all indicate that it is entirely necessary and also possible that a new group of fast-growing industries will emerge. This group of industries will offer a strong driving force and can sustain for a long time. China is still in a state of dualist economy. The growth of peasant income is more and more relying on the development of non-farm industries and the process of urbanization. On the other hand, the economic growth in the urban areas is mainly relying on the upgrading of industrial structure, which arises from the upgrading of consumption structure. Most urban residents have basically solved their problems with food, clothing and outlay to some extent, and are seeking higher-quality life in housing, transportation, communications and other areas. In response to the changes in consumption structure, housing, automobile, machinery, electronic communications, building materials and urban and rural infrastructure construction as well as the service industry that supports production and living are very likely to become the fast-growing industries for a new round of economic growth.

However, the reality is that most of the above-said industries failed to reach a growth level as high as expected. The reason is that most of these industries have met with many obstacles in market demand and industrial access. For example, the welfare-based housing distribution system has been preliminarily broken up, but the introduction of the currency-based housing distribution system, the opening and nurturing of the secondary housing market and the development of related financial services still find it difficult to move forward in many places, including in some large and extra-large cities. (Of course, some cities have posted relatively fast progress, which also constituted the basis for the rapid growth of the housing industry in recent years.) The restraining consumption policy and the strict industrial access policy have for long made the prices of most automobiles in China far higher than that of the international market prices. This has made the consumption and production of the auto industry unable to enter a virtuous circle. Infrastructure construction has depended excessively on the distribution of the financial funds and administrative resources of the government. The roles of the market investment and financing system and mechanism seem grossly inadequate. The incompleteness of the social security system, coupled with fund shortage, has made the consumer behavior of the mid- and low-income groups more cautious and conservative. Because of these system and policy problems, some industries or sectors that are highly hopeful for fast growth cannot fully release their potentials. The fact that there are relatively few industries entering the fast-growing ranks is a macro manifestation of inadequate domestic demand. As a result, the growth rate wanders at a relatively low level. In this sense, the so-called inadequate domestic demand can be interpreted as "institutional inadequate demand".

Under this circumstance, the expectations of social consumption and investment have declined, the existing economic and social contradictions intensified, and some new contradictions emerged. Most importantly, the peasants are having less opportunity to enter into non-farm industries and the urban areas, and are seeing their income growth slowing down. It has become increasingly clear that the key to higher peasant income is to bring the overall national economy into a virtuous circle while agriculture should continue to receive attention and score improvement. Secondly, the greater employment pressure, the increased employment frictions and conflicts between urban and rural labor forces and the increased number of laid-off and jobless people have increased unstable factors in society. Thirdly, the declining investment expectation has made it more difficult for the enterprises, especially the small and medium-sized enterprises, to raise fund. Undoubtedly, the fund-raising difficulty of the enterprises has something to do with the financial system that cannot operate smoothly. But more importantly, their fund-raising difficulty arises from the "difficulty in finding good projects" when the expectation of investment returns is low.

Inadequate domestic demand and slower economic growth have resulted in many problems and difficulties, which tend to accumulate repeatedly. Unless the issue of driving force for economic growth is solved and the potential of the fast-growing industries is fully released, many of the problems and difficulties cannot be fundamentally eased.

II. The Driving Force for Economic Growth is Undergoing Important Structural Changes.

In view of inadequate domestic demand, the central government adopted a proactive fiscal policy highlighting the issue and use of treasurybonds. It has been proved that if the government had not adopted this policy, the economic growth rate in recent years would have been impossible to stay above 7 percent. At the same time, the central government also adopted a number of policy measures for the reform of the state-owned enterprises, the housing system, the social security system, and the financial system as well as the adjustment and upgrading of the economic structure. If the proactive fiscal policy is mainly designed to stabilize the process of economic growth, the policy measures are more aimed at nurturing a new driving force for economic growth.

While the important roles of the proactive fiscal policy should be affirmed, this policy cannot continue for a long time, as many people have pointed out. The problem is how to make up for the growth gap left over by the waning out of this policy? Our hope again relies on a new group of fast-growing (treasury bonds) industries. An ideal probability is that the driving role played by treasury bonds will gradually be replaced by that of the new fast-growing industries.

It is encouraging to see that this replacement is already underway. On the one hand, the driving role of the treasury bonds fund for the economic growth has been gradually reducing. In recent years, the increase of the total GDP volume has been rising annually while the scale of treasury bonds fund has maintained at the original level. This is an indication that the dependence of GDP growth on the input from the treasury bonds has been lessening. According to the analysis of the Research Department of macro-Economy of the Development Research Center of the State Council, the budgetary investment fund that is closely related to treasury bonds went up by 51.8 percent in the first half of this year, but accounting for only 7.9 percent of the increased funds (excluding collective and personal investments). Secondly, the collective and personal investments in the urban and rural areas, which scarcely have any links with treasury bonds investment, increased by 15.8 percent and 19.4 percent respectively in the first half of the year, which were 3.2 and 10.3 percentage points higher than that in the first quarter. Thirdly, the real estate investment, which also has little links with treasury bonds investment, rose by 32.9 percent over the same period of last year. While this growth was 4.7 percentage points higher, its proportion of the total increased investment already reached 32.1 percent. Fourthly, in a regional perspective, the eastern region, which is less dependent on treasury bonds investment, saw its investment rising by 22.9 percent in the first half of the year, which was 2 percentage points higher than that in the western region.

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