Achieving 8 Percent GDP Growth on Investment Alone?

飞雪寒冰

China's gross domestic product grew 7.1 percent in the first half of 2009, in large part due to investment, according to the National Bureau of Statistics. The central bank said in July that it will maintain a moderately loose monetary policy to ensure stable economic growth.

Zhao Jian, professor of economics at Beijing Jiaotong University, said that since China's economy should be able to grow by 7 percent in the next three decades, the country should not expend extra efforts simply to obtain an 8 percent GDP growth. In particular, he mentioned that the 7.1 percent GDP growth in the first half is not "a reason for being optimistic" as the economy has mainly been driven by investment, rather than consumption.

Investment contributed to 87.6 percent of the GDP growth in the first six months, which is not sustainable because it approaches the limit for the contribution of investment to GDP, said the professor.

China's economy grew by 7.9 percent in the second quarter, close to the annual target of 8 percent, Zhao said, but this was in large part due to the government's fiscal stimulus and loose monetary policies, which, if maintained, can enable the economy to grow by 8 percent or even 9 percent.

飞雪寒冰

Yet he noted that China should not merely rely on fiscal stimulus from the government because government-backed investments may lead to inefficient and insolvent projects, which demand enormous financial subsidies in the future. That would be a heavy burden to China's economic development in the long term, he said.

"This is already the case in investments in railway and road networks," said the professor, warning against the Chinese government's investment in high-cost high-speed railways and highways.

Should the projects fail, he said, "That would set off a debt crisis for local governments and the railways ministry and force commercial banks to shoulder a few trillion yuan of bad loans. China's fiscal revenues cannot cover such an astronomical loss."

飞雪寒冰

Fiscal stimulus only works in the short term, he reiterated, adding that the government should remove barriers for private enterprises in production and encourage private investment.

He admitted that it is more difficult to boost domestic market demand than overseas market need.

"Foreign markets are already there, but a domestic market still needs to be fostered, which calls for more active participation of private enterprises. A systematic change is needed to increase production and expand the domestic market," he said.