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China can afford a 'mild slowdown'

(China Daily)
Updated: 2008-07-22 15:01

Editor's note: As China's economic growth slowed to 10.4 percent in the first half of this year from 11.9 percent last year, people have been increasingly concerned about the country's economic prospects this year and the next. China Daily has conducted a series of interviews with domestic economists on different facades of the economy to find out how it will fare and what the policymakers should do to tackle the impending challenges. The following is the first in the series, which is based on an interview of Dong Yuping, a senior economist with the Chinese Academy of Social Sciences, by Xin Zhiming.

A vendor waits for customers at a vegetable market in Shanghai June 13, 2008. [Agencies]

Q: The Chinese economy has shown some signs of slowdown in the first half of this year. How do you view this?

A: The Chinese economy, on the whole, has been stable. Although it slowed down to 10.4 percent (in the first six months of this year), it is acceptable. Actually so long as it remains in the 8 to 10 percent growth band, it is fine. The scale of the Chinese economy has become very large while the population growth is slowing. Therefore, we can afford a mild slowdown in economic growth.

Q: Although consumer inflation is coming down, many fear it may surge again. Will it rebound in the coming months?

A: The consumer inflation, which dropped to 7.1 percent in June, is showing a downturn. It is attributed to economic fundamentals (such as the stabilizing of food prices) and the relatively high inflation base last June. But we noticed that the producer price index is going up continually. In theory, the rising momentum will gradually spill over to push up consumer inflation, but actually the impact would not be as serious as expected.

China still controls prices of many products. The oil product prices and those of many public goods are under control.

Regarding agriculture, input prices, such as fertilizer costs, have been rising fast in recent months, policymakers have increased subsidies, which prevents the price rises from spilling over into the agricultural product zone.

Moreover, the market competition for durable goods, such as cars and electrical household appliances, is fierce, which means it is almost impossible for prices to rise.

Q: A large number of enterprises in the coastal regions have plunged into the red as costs are rising and the yuan is appreciating. How should China tackle such a challenge?

A: Indeed, returns of those companies, especially those original equipment manufacturers, have been low. Some of them cannot survive the rising costs and are shaken out of business. What may have been neglected, however, is that some capacities have merged into other companies with technological and managerial advantages and the losses for the whole economy may not be as big as expected. It is in a sense industrial updating.

What the government should do is use lending, fiscal or industrial policy support to shorten the process and minimize the costs of such friction. Policies should be flexible.

Q: As the economy slows down, small enterprises may suffer a bigger impact than the big ones. How should policymakers help them get out of the difficulty?

A: China's financial system is defective since it favors big companies. Zhejiang province has recently started to pilot microcredit companies, which shows the authorities are making efforts to change the scenario. But it may not be in line with market demand. The market must be taken into consideration.

Moreover, the regulation of small financial institutions must be flexible and it should be different from those big banks. We should have systematic arrangements that cater to the small banks targeting small enterprises.

Q: The top national leaders have toured many economic powerhouses, which has been interpreted as a sign of worry about the country's economic growth. How do you view such visits by the leaders?

A: We should not overreact to such visits. They visit local places every year, although each year they have a different focus or agenda. Of course, their inspection tours are not without cause and there must be new things (in the economy) that demand further study. Different people may think of the tours differently, however, it is unnecessary to think that there would be any major policy change in macroeconomic regulation.

Q: The US economy is suffering new problems as Fannie Mae and Freddie Mac are triggering worries that the economic adjustment would last longer, which will affect the global and Chinese economy. How will the Chinese economy go next year?

A: After Fannie Mae and Freddie Mac were dragged into crisis, the US subprime crisis has become a real estate crisis. It will not last for only one or two years. It will be very lucky if the market starts to recover from the end of next year. From a historical perspective, the US housing market correction may last for a decade under the trend.

US financial and economic woes would affect China's economy. Moreover, the surfacing housing market correction in China will drag down the country's economic growth, just as it has contributed greatly to its strong growth in the past years.

Moreover, the stock market has slumped, which has weakened investor confidence and forced enterprises to adjust their financing plans. Their economic activities would have to change accordingly.

All those events would make next year very difficult for the Chinese economy.