The Hindu Business Line : Winds of change in China's growth strategy

CHINA'S 2.3 trillion dollar economy, the fourth largest, continues to power ahead but its leaders have become more aware than ever before that more than half of its 1.3 billion people are getting caught in the ever widening rural-urban income disparities and regional imbalances which could potentially lead to a social explosion.

The new strategy embodied in the Eleventh five-year plan (2006-2010) makes a major departure from the traditional focus on higher growth through its exceptionally high rates of savings and investment to achieving a more "balanced growth" for building a "prosperous, harmonious society" and with reduced dependence on energy, resource and capital-intensive modes of progress. Greater "self-innovation" in economic transformation is another thrust factor in the plan.

Internally, Chinese leaders are beginning to view with greater concern the growing rural-urban income disparities and the disturbing divide between thriving coastal zones on the east, the northern and western areas, the migration of surplus labour to cities aggravating the unemployment situation, and potential threats to social and political stability.

They have, therefore, decided to lay greater emphasis, without giving up the centrality of relatively high and sustained growth, on bringing about a leap forward in modernisation of agriculture, improving the welfare of farmers, building rural infrastructure to urban levels and laying the foundation for building "a new Socialist countryside".

A UN report on China's development recently cited the wealth gap between urban and rural communities as one of the highest in the world and the "palpable" inter-regional inequalities. But it noted that the Government was coming to grips with the problem of redressing imbalances in economic and social development.

The report called for spread of education, health care and social security protection as part of measures to bring down inequalities across regions. China's Eleventh five year plan gives primacy to these factors and it will be reviewed and approved by China's supreme legislative body, the National People's Congress, at its March 2006 session.

Beijing plans to spend more for agricultural development and infrastructure construction, which would help to boost grain production, ensure food security for the people and arrest the drift towards urban areas. Education and health care will get higher financing. Policies will be set in motion for protecting farmland, safeguarding rights of workers and providing employment and job training in the rural areas. The Government recently abolished the centuries-old agricultural tax as part of measures to improve the condition of farmers and increase transfer payments for the poorer segments.

Other tax reforms have been under way. Including unification of corporate tax to do away with the wide difference between the rates of domestic companies at 33 per cent and of foreign-funded firms at 17 per cent, rise in personal tax exemption limit and incentives to encourage employment and re-employment which will also cover agriculture and rural development.

The spectacular growth record of China over the last two decades, averaging more than 9 per cent, has not brought about any dramatic transformation in the countryside, and India would do well to learn from the Chinese experience that mere harping on 8-10 per cent growth will not take us far unless there is a more holistic approach to development.

The UPA Government does realise that growth has to be "inclusive" and is attempting to make good past failures in achieving social development and equity through a range of programmes launched recently. But what really matters is how far it succeeds in delivering results.

China's National Bureau of Statistics (NBS), has re-worked economic growth since 1993 after a census of productive sectors which revealed a much higher level of activity not so far captured in national accounts. Almost 90 per cent of the revision is accounted for by higher value-added in the services sector and faster price increases than assumed earlier. The revised data for 2004, the census year, showed a 16.8 per cent rise in the size of the economy with GDP growing by 10.1 per cent, a double digit for the third year in succession, to make China the sixth largest economy. With another 9.9 per cent rise in 2005, GDP exceeding 2.2 trillion dollars, China is now the fourth largest economy, having outpaced France and Britain, and behind only to the US, Japan and Germany.

China's per capita income is roughly $1,700 which, with its population, does not make it any the less a developing country. Apart from the significant rise by 9 percentage points in the share of tertiary sector (services) to GDP from 31.9 per cent (old) to 40.7 per cent (new) at the end of 2004, the census data does not alter the broad picture of the economy and its growth pattern, but it provides a more reliable base for the Eleventh plan formulations and its priorities in economic and social development.

The revised composition of GDP shows, apart from the increase in share of services, a decline in that of industry (including construction) to 46.2 per cent from 52.9 per cent (old data) and that of primary sector (mainly agriculture) to 31.1 per cent. Although China's investment rate has been quite high, it was only 41 per cent in 2004 as against the earlier estimate of 48 per cent, but even this is relatively high in relation to most economies, including Asian countries.

NBS Director, Mr Li Deshui, draws the inference that the economy at this level of investment is not over-heating and is maintainable for "fairly fast and sustained growth" which the planners would want to stabilise at 8-9 per cent.

He notes that in 2005 the share of consumer spending in GDP was 33.3 per cent — a sign of domestic demand taking over from exports as the driver of growth — while investment and exports contributed 48 per cent and 18 per cent respectively. There has been neither inflation nor deflation. China's long-term explosive growth and its emergence as the world's manufacturing hub and third largest trader and India's catching-up as a fast-growing economy with its abundance of skills are being increasingly seen as a transformation under way of the global economic landscape.

While foreign investors may look at huge market opportunities, there are underlying concerns about their rising competitiveness. Developed nations, who have dominated the world, are weighing the impact that the two Asian giants can make on the global economy, earth's resources and environmental conservation. With a growing appetite for natural resources for the ongoing expansion, the two countries would account for a substantial increase in the world demand for energy.

The Eleventh plan has indicated two targets for 2010: Doubling the per capita income of 2000 and reducing energy consumption by 20 per cent. The World Bank in an update on the Chinese economy considers per capita income doubling feasible with only 7 per cent average growth as against the trend rate of 9.5 per cent but is sceptical about the targeted reduction in energy use which shot up in recent years.

The National Development and Reforms Commission, which is the planning body, has set up a task force to frame a new energy policy for security and is also working on a long-term plan to increase use of alternatives — nuclear, wind and solar energy. Increasing use of ethanol and coal liquefaction are also on the agenda. China's two-way trade last year totalled $1.4 trillion, exports growing by 28.6 per cent and imports by 17.6 per cent.

Although in the second half of 2005, domestic demand overtook exports, the trade surplus tripled from the previous year level to $102 billion and reserves totalled $819 billion. With its decision to rely more on domestic consumption than exports, China expects diminishing surpluses. But the World Bank sees it as a gradual process and has projected the reserves to rise close to $1 trillion by the end of 2006.

(The author, a former Chief Editor of PTI, is a freelance journalist.)