China needs to monitor the sustainability of economic growth, taking measures to bring unsustainable factors under control, said Wu Xiaoling, Vice Governor of the People's Bank of China at China's 2006 Macro-Economic Forum held at the People's University on Saturday.

Sustainable development restricted by five factors

Wu Xiaoling named environmental protection as the first of five factors affecting sustainable development. At present, many projects go ahead at the expense of the environment. The concept of "Green GDP" was recently proposed, which would mean deducting the amount of money spent on depolluting the environment from the GDP.

The second factor that restricts sustainable economic development in China is resources. Many of China's resources are limited. In 2004 the country launched a number of projects to generate more electricity, which quickly led to a surplus. This could in turn lead to the rise of some projects which consume a lot of energy, creating a vicious cycle.

The third factor is labor and social security. Despite its rapid economic development, the Chinese laborers have not enjoyed the proper benefits. People have very little welfare and social security. The country's overall welfare level is far lower than that of Europe, the United States and many other countries.

The fourth is the low rate of inflation because of price controls. China's current inflation rate is not high and this is because of price controls. The prices of many products, particularly those of resources and services, do not reflect the relationship between the market supply and demand. A market pricing system that reflects interaction between supply and demand has not been established.

The final factor is the absence of real accumulation of wealth. China includes a lot of duplicate construction in its GDP figures. This happens when, for instance, people pull down houses in urban and rural areas to build new ones and then pull them down again and build more. All such development has been included in GDP, when in fact there has been no actual change in people's wealth.

Creating a favorable policy environment

According to Wu, because of these restrictions, China's GDP growth is low quality. However, rather than than seek a high growth rate, the government should try to create a favorable policy environment, limit sewage, and lower energy consumption. This would ensure healthy and sustainable economic development and create a better living environment for China's children.

In the meantime, China should ensure the financial environment remains stable and the price scale reasonable. The central bank should aim for a stable and low inflation rate. Furthermore, it should increase fiscal expenditure on public services. At present, China has a high savings and investment rate, of which the share of investment by individuals is actually dropping and that of enterprises and governments is rising. If the government wants to increase domestic demand, it needs to find a way to reverse this trend. Enterprises should increase salaries and allow individual consumers to determine the proportion of consumption in their income, so as to promote consumption and improve investment returns. The government should increase public spending, particularly expenditure on education and health. This would ease consumers' consumption-related worries of residents and allow them to consume more.

Wu explained that a tight money supply does not mean a shortage of funds. With an excess liquidity, there is difficulty in direct financing. The current financial structure is irrational. Therefore, instead of increasing the money supply, China will accelerate financial restructuring next year.

Wu also pointed out that based on the recent surge of foreign exchange reserves the central bank has to release a large amount of base money. However, it still needs to pay attention to the scale of credit. This is because the central bank has not taken the initiative to purchase foreign assets. In order to control the money supply, it must monitor the situation carefully and appropriately regulate domestic credit.

By People's Daily Online