Xunlei LI: China’s Economy Facing Partly Overheated Problem

 date:2010-4-11 9:43:00          

China's Economy Facing Partly Overheated Problem

Xunlei  LI

Chief EconomistGuo Tai Jun An Securities

In 2009, under the circumstance of weak external demand, China's real GDP growth rate still reached to 8.7%. By the 4 trillion stimulus package, China's internal demand was greatly stimulated. In 2010, however, external demand may also pick up to some extent.

In the fourth quarter of 2009, the growth rate of the U.S. Economy reached to 5.7%. According to the historical data, private investment and employment in manufacturing industry will recover one year later than the national economy. Thus, the quick recovery of investment and employment will greatly contribute to the growth of US economy. Due to the recovery of the economy, US consumption will increase substantially and China's export will increase correspondingly.

Meanwhile, it is not quite possible that China's fix investment sharply decreases in the short run. Once the project is started, especially the infrastructure investment, it will take several years to finish it. Moreover, the subsequent investment usually needs more funds. If we take the relatively stable growth trend of consumption into consideration, the aggregate demand will inevitably expand tremendously. Base on the predicted data, the growth rate of China's GDP will reach to 10% in 2010.

In the long run, though China's economy may continue to grow rapidly, the economic structure may change to depend on inner demand more heavily. Urbanization will be the new engine for the economic growth. However, there are several obstacles for the future growth. Compare to other countries, our expenditure on education and health is much lower relative to GDP. If the problem cannot be tackled properly, the income distribution will get worse and the inner demand may not increase at a satisfying rate.

Since 1995, the Chinese government has been emphasizing the importance of optimizing the economic structure. After 15 years, however, we don't see much positive improvement. The fundamental reason is the institutional problems. Because little effort was made after the successful reform of finance and tax system, GDP growth rate remained to be the number one priority for local and central governments. Therefore, we need to focus on solving the institutional problems. Only in this way, can we optimize our economic structure and make the growth of the economy sustainable.

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