Will China's economy hit an inflection point next year?

Some media have been predicting that China's rapid economic development has reached the glass ceiling and that a downward inflection point will appear as early as next year. Wang Tongsan, director of the Institute of Quantitative and Technical Economics at the Chinese Academy of Social Sciences accepted an exclusive interview to address China's general economic prosperity in the coming year.

Understanding the economic inflection point

Q: What is the meaning of an economic inflection point?

Wang Tongsan: Academically, an inflection point can be explained in this way. When we look into the economic growth rates in both the first and second year, it doesn't matter if the growth rate in the second year is higher or lower. The key is the growth rate in the third year. If the economic growth rate increases in the second year, and continues to rise in the third, this is not an inflection point. If the growth rate increases in the second year but decreases in the third, then what we call an inflection point has occurred. Similarly, if the speed of growth decreases in the first and second years but increases in the third, this is also an inflection point. Put it into a statistical example, China's economic growth rate was 10.3 percent and 10.5 percent in 2005 and 2006 respectively. If the economic growth rate in 2007 is lower than 10.5 percent, an inflection point will be charted.

However, the occurrence of an inflection point does not necessarily mean that the entire economic situation has dramatically changed. The inflection point should be understood from two perspectives. The inflection point may indicate normal fluctuations in the economy. The growth rate could simply be a bit higher for two years and slightly lower in the next two. Inflection points can be found in normal fluctuations of the economy. However, the inflection point may also indicate overall economic operations have to some extent, undergone a qualitative change. This qualitative change appears in two forms: one is quite intense, representing a change of one and a half or two percentage points or even more; the other is a more moderate fluctuation. However, even though the changes are not drastic, they indicate a trend, which will continue for several years in the same direction after the inflection point first occurs.

No qualitative inflection point will occur

Q: Will China experience an inflection point next year?

Wang Tongsan: In my opinion, no qualitative inflection point will occur in China's economic operations in 2007. Most people now agree that there the Chinese economy has been growing too fast. To correct this, we have implemented some necessary macro-controls which have been shown to be gradually effective over the last few months. Next year, the effects of macro-controls will be more obvious. It is expected that the economic growth rate will be around 10 percent in 2007, probably lower than the growth rate of 10.5 percent in 2006. This is a normal inflection point, not a turning point representing a qualitative change in the entire economic situation.

There are several pre-conditions for the creation of an inflection point that indicates a qualitative turning point in the economic situation. At present, these conditions, which include war, natural disasters or an oil supply crisis, do not exist in China.

Except for war, modern China has had experience dealing with all these other external factors and has taken certain precautions to guard against them. China's national strength is continually growing and it has a greater ability to deal with natural disasters. To avoid major economic fluctuations, China needs to prevent major policy failures and problems or mistakes in macro-control work. China has gained a lot of experience in macro controls over the past 20 years. It has a deeper theoretical understanding and mature practical skills. According to the sketch map of economic growth, the magnitude of economic fluctuations is getting smaller and smaller, unlike in the 1980s and1990s when differences of five percentage points appeared between two consecutive years.

Momentum behind three driving forces

Q: What are the driving forces behind China's sustained economic growth?

Wang Tongsan: From an economic perspective, there are three driving forces influencing economic growth: investment, consumption and net exports. All three forces are currently very powerful.

The scale of investment is relatively large with a fast growth rate. Investment is still the main factor stimulating the country's economic growth, and momentum is still strong. What we need to do in terms of implementing macro-controls, is to scale back and control further investment. The rate of investment should not grow too fast. In particular, we need to adjust the investment structure and ensure it is conducive to the overall economic restructuring.

The growth rate of consumption is also increasing. If retail sales are used to analyze the social consumer goods situation, we see that retail sales of social commodities are growing faster and faster. The growth rate in the first three quarters of this year is higher than that of the past two or three years, which demonstrates that consumption is playing a more important role in boosting economic growth.

The net export surplus is huge. This has become a major problem that may impact the stability of China's macroeconomic operations. Therefore, as a strategic planning requirement of the 11th Five-Year Plan, the central authorities are demanding to adjust the growth mode of foreign trade. As an important part of the reform, China strives to achieve a basic balance in foreign trade, which means that there should not be such a large trade surplus. Last year, China's trade surplus totaled US$101.9 billion. Most people predict that the gross volume will reach US$150 billion this year, a 50 percent increase. In the short-term, this could be a very strong economic driving force. However, if the economic situation is viewed as whole, this is actually a negative factor and special attention must be given to the issue.

Consumer demands to be promoted

Q: What problems should China focus on for future economic development?

Wang Tongsan: Economic operations are very complex. We have to understand how to maintain an overall balance. The most important thing is of course to strengthen macro-controls, expand reforms, and gradually perfect the socialist market economic system. It basically comes down to bringing the role of the market into full play and strengthening macro-controls.

We need to do more to promote domestic demand, especially consumer demand. The key point here is to formulate a favorable income distribution policy. Many issues and problems currently emerging in macroeconomic conflicts are related to the income distribution policy.

In the long-term, China needs to base its economic growth on domestic demand and ensure that investment and consumption occurs smoothly. Our main purpose is to raise the quality, adjust the structure, and enhance the efficiency of investment. In the meantime, we need to prevent excessive investment as well as work around the problems resulting from excessively rapid economic growth and economic overheating. We should promote consumption and ensure that consumption and investment play an equal role in stimulating economic growth.

By People's Daily Online