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China records strong growth

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Defying global trends: Rural residents buying washing machines with government subsidies at a trade fair in south-west China’s Sichuan province in March. The subsidies to boost rural consumption, along with other stimulus measures, are said to be the main factors behind China’s strong second quarter growth.
Defying global trends: Rural residents buying washing machines with government subsidies at a trade fair in south-west China’s Sichuan province in March. The subsidies to boost rural consumption, along with other stimulus measures, are said to be the main factors behind China’s strong second quarter growth.

Ananth Krishnan

Economy still faces fundamental challenges

BEIJING: Exceeding most expectations, the Chinese economy grew by 7.9 per cent in the second quarter of this year in the midst of the worst economic downturn the country has faced in more than a decade.

The surprisingly strong growth figures released on Thursday indicated that the Chinese government’s massive 4-trillion-Yuan ($586 billion) stimulus package was paying dividends, said analysts, though it remained unclear for how long the boost from the stimulus package would last. The Chinese economy still faces a number of long-term challenges; chiefly, making growth less dependent on exports and stimulating domestic consumption.

The figures mean China is back on track to meet its target of 8 per cent annual growth in a year when the economies of many countries, including the United States, will likely contract. There were fears that China would fall short of its target with a steep fall in exports in the last 12 months as a result of falling demand from the United States and Europe. The export-driven economy grew by only 6.1 per cent in the first quarter of this year.

Growth figures released by China’s National Bureau of Statistics (NBS) on Thursday suggested the rebound was largely driven by the massive stimulus plan the government unveiled in November, which called for a 4-trillion Yuan investment in infrastructure projects. Fixed asset investments increased by 33.6 per cent in the first half of this year as compared to last year. The growth was also a result of considerable easing of monetary policy in recent months. Bank-lending reached a record 7 trillion Yuan in the first half of the year, and is expected to cross 12 trillion Yuan in 2009. Both officials and analysts reacted cautiously to Thursday’s figures, maintaining that the growth only reflected a short-term boost from massive government spending and that the economy still faced a number of more fundamental challenges in the long-term.

“The difficulties and challenges in the current economic development are still numerous,” said Li Xiaochao, spokesman for the NBS. “The basis of the rebound is not stable. The base for recovery is still week. The recovery pattern is unbalanced and thus there are still uncertain and volatile factors in the recovery process.”

Tom Miller of the Beijing-based Dragonomics research firm told The Hindu that the biggest long-term challenge China faced was making its economy less reliant on exports and stimulating the domestic market.

“The Chinese government right now is basically compressing a decades worth of infrastructure in a two to three year period,” he said. “We expect growth to reach 8 per cent this year but this [pattern of growth] cannot go on indefinitely. It does not look like exports will return to the levels of what they were [before the recession] for at least another four or five years. The question is what China can do to drive the domestic market.”

The Chinese government in October passed a landmark land reform law allowing farmers to sell land-use rights for the first time to boost rural incomes and increase domestic consumption.

Mr. Miller said the land reforms would help, but added that China also needed to liberalise its financial sector and deregulate its services sector, which was still dominated by State-owned enterprises, to further drive domestic consumption.


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