Govt should shift focus from expansion to better distribution of resources

Fears of a prolonged economic slowdown in China have now become all pervasive, and fresh data appear to buttress them.

China's foreign trade rose 2.7 percent last month compared with a year earlier. Exports, a major help to economic growth, rose only 1 percent, and imports rose 4.7 percent.

All these figures represent a sharp slowdown from previous months, and they appear to add to the difficulty of achieving the yearly target of having foreign trade to grow 10 percent. In fact, in the first seven months China's trade rose 7.1 percent compared with a year earlier.

The central bank says the country's bank lending fell 41.3 percent last month compared with the previous month, the lowest monthly figure since September last year. Chinese banks extended 540.1 billion yuan ($84.9 billion, 69.1 billion euros) in new loans last month, compared with 919.8 billion yuan in June, the bank said.

Fewer loans mean that businesses are reluctant to borrow amid poor prospects and investment confidence.

Growth of industrial output, the key monthly measure of China's economic health, dipped to 9.2 percent for the year ended July, down from 9.5 percent in June and the lowest level since May 2009.

Electricity generation, an important gauge of industrial activity, registered a meager 2.1-percent year-on-year increase, suggesting a sharper slowdown in energy-intensive heavy industry.

Things look bleak, and businesses and economists have not been shy about expressing their worries since the new figures were published.

Also feeling worried are Chinese policymakers, especially after GDP grew only 7.6 percent in the second quarter.

One thing showing how worried they are is that policymakers decisively cut interest rates twice, in June and July. That is a rare move because usually they do not cut interest rates if there is still room to reduce the bank reserve requirement ratio.

Missing the growth target of 8 percent, a psychologically important mark, is seen as an alarm for decision makers. For years Chinese policymakers have nursed the belief that achieving a growth of no less than 8 percent is a prerequisite for China to maintain its stability, economically and socially.

But is China's economy really slackening to an extent that threatens social stability? The answer is no.

A slowing economy causes social troubles mostly because people get angry when unemployment rises and salaries fall in a poor economy. But we saw those two things turn out differently recently.

"The Employment Situation of College Students 2012", a report published last month by the education research company Mycos, showed that the employment rate among fresh graduate college students is 90.2 percent, compared with 89.6 percent last year. And their monthly salary on average is 2,766 yuan, an increase of more than 10 percent on the 2,479 yuan a year ago.

For migrant workers, many of whom work in the manufacturing and export sectors, massive layoffs did not happen.

A survey by Universal Consultancy of Shanghai showed that 63 percent of manufacturers and exporters in the Pearl and Yangtze river deltas, China's two manufacturing centers, said they planned to recruit more workers before this month to prepare for Christmas orders. About 18 percent said they would neither add nor reduce their workforces. Only 19 percent said they might lay off some workers, but they said they would not lay off more than 10 workers.

The survey involved about 320 small-sized companies, each recruiting fewer than 500 workers, from March to June. Compared with a year earlier, those planning to hire more workers rose 7 percentage points, while those wanting to lay off workers were essentially on par with last year, the consultancy firm said.

Clearly, the Chinese economy is not as bad as it was in late 2008, when massive layoffs and salary freezes were rampant.

In addition, the interplay between economic growth and social stability is not as high as many have suggested.

China has entered a period of high occurrence of mass incidents not because the economy is slowing but because the reform of the social system has failed to catch up with public awareness and economic development.

Inequality, rather than want, is the cause of trouble, as a Chinese saying goes. That is particularly true when Chinese people have basically been pulled out of poverty and begin to care about their social identities and ask for more than clothes and food.

In that sense, China should shift its focus from economic expansion to better distribution of its resources and of the economic cake.

In recent decades what the country has done is to make the cake bigger so that even though it was not equally divided, every one of its people could get a bigger slice.

But that mode has to come to an end because no economy can be sustained to grow at such a high speed to make sure every piece of cake given to its people always gets bigger.

As the cake stops growing - or to be precise, as the growth in the size of the cake is not as robust as it was - it is important to make sure the cake is divided equally. That is not to say that everyone has to get the same amount of cake. It is about giving everyone equal opportunity to partake of the cake.

To sum up, the Chinese government does not need to desperately keep the country's economic growth above 8 percent. Instead, its urgent task is to redistribute resources and incomes and rebalance regional economies.

At least two things need to be done to achieve these goals.

One is to give equal footing to private companies in sectors now controlled by State entities. The other is to ensure that migrants enjoy equal welfare as local residents.

It is good to see that the government has published some plans to give private investors large access to some strategic industries including national defense and that a few cities are mulling the reform of the hukou (permanent residency permit) systems.

Those reforms, which will take a long time to yield results, should be carried out immediately and steadily, regardless of macroeconomic conditions.

China has tended to press ahead with reforms when the economy is doing well, but has put such reforms, both economic and social, on hold, or even reversed them, in times of economic trouble.

For example, the reform of the foreign exchange system was suspended during the financial crisis in 2008-09.

Indeed, policymakers should be able to change their minds. Stability is of the utmost importance, especially during an economic slowdown. But if that stability comes at the price of missing the best timing of reforms, problems will accumulate and grow into bigger problems that ultimately will be more difficult to solve.

The author is a financial analyst in Shanghai. The views expressed here do not necessarily reflect those of China Daily.

(China Daily 08/17/2012 page9)