Economic Restructuring Should Take the Market as its Guiding Principle

Since China launched its 4 trillion yuan stimulus package in November last year, everybody has been searching for signs of an improvement in the country's economy. Now that we've reached the end of the second quarter, we have a perfect opportunity to consider whether China's economy has recovered from the downturn.

The Economic Observer (EO) recently interviewed Wu Xiaoling on the economic recovery and asked her to assess the implementation and utility of the gradually unfolding 4-trillion-yuan stimulus package.

Wu Xiaoling is deputy director of the 11th National People's Congress Financial and Economic Affairs Committee. Before she took up this post, she served as vice president of the country's central bank from 2000 to 2008.

The EO: We've already entered the third quarter, has China's economy witnessed a recovery?

Wu Xiaoling: Judging from economic data released in the first five months of this year, the country's economy has stabilized. Thanks to intensified government investment and a drastic increase in additional loan issuance since the fourth quarter last year, China's economy has reversed its downward trend.
Given the second half of last year saw a relatively slower rate of growth, the pace of economic development in the latter half of this year is expected to pick up. However, whether such a quickened pace can be sustained remains to be seen.

National finances will face huge pressure in the future. Looking at the fiscal revenue of recent years, you could say we were well-off, but these increases stemmed from fiscal and taxation reform undertaken over many years.

However, we still have a lot of outlays, especially in the area of social security payments.

It will be hard to meet the budget estimates made at the beginning of this year and the government should do its best to increase its fiscal revenue while cutting expenditure.

The EO: Could you talk about the implementation of the 4-trillion-yuan stimulus package and describe some of the problems that need to be addressed?

Wu Xiaoling: I think the government has left itself some room to reduce or defer the amount of investment in infrastructure construction. The main aim of the government's considerable investment in infrastructure beginning in the fourth quarter of last year was to prevent the country's economy from free-falling due to the impact of the international economic crisis. Generally speaking, as the government intensified its investment, the downward trend has been curbed and the economy has stabilized.

However, during this process, structural problems began to develop and fiscal revenue and expenditure have also faced challenges. Based on the present circumstances, as I understand them, because a huge amount of investment was rushed through in such a short time period, some projects did not receive adequate preliminary assessment.

Although the four-trillion-yuan stimulus package has indeed played an important part in boosting the economy, it also hides a large amount of waste.

At present, economic decline has been prevented, but the growing gap between national fiscal revenue and expenditure has become a pressing problem. Do we want to slow down the rate of investment in some of the infrastructure projects in order to limit the deficit so that it doesn't exceed the budget set at the beginning of this year?

My suggestion is that the relevant departments should adjust the requirements made on investment projects, namely the priority should switch from one that emphasises the speed of a project, as it was in the first half of this year, to to one focused on the quality of a project.

Against the backdrop of economic stabilization and increasing fiscal pressure, deferring investment in some of the infrastructure construction projects  would likely help to balance the fiscal budget and ensure funds for further reform. After all, sustainable economic development is driven by the market.

The EO: As China switches its focus of macro-control policy to "structural adjustment", how do you see the changes ahead and what problems should we pay attention to?

Wu Xiaoling: Now that the economy has stabilized, China needs to focus on resolving structural problems within the economy and also on changing its economic growth model. The reason for this is that, although some of the economic problems we face are related to the international financial crisis, the most important cause is our faulty economic structure.

Furthermore, the current condition of China's environment and natural resources also won't allow the economy to continue to develop along the lines set out according to the former development model.

We can no longer rely on massive fiscal and credit investment to bolster our economic development, rather, we need to begin to reform.

China's economy requires structural reform on three levels:

The first refers to adjusting national income distribution. Up until now, our economic development has been highly-dependent on investment and exports because domestic consumption remained weak and the proportion of disposable income in terms of total national income has trended down. In order to promote domestic consumption capacity, we need to increase the ratio of individual disposable income in relation to the total national income and by doing so we can also help solve problems related to social security.

The second is the need to further develop tertiary industries.

The third is that we should reduce the development of industries involved in heavy-polluting and high-energy-consumption production and instead aim at developing energy-efficient and environment-friendly industries.

In addition, we should encourage the development of competitive companies in various industries.

Realizing these three adjustments depends on our ability to reform the economy.