Author: Fan Gang, President of CDI
Editor’s Note: Because of the two overheatings, we have to take time handling the after-effects. If we continue reform and prevent an overheated economy, it is entirely possible that we can maintain a sound economic growth in ten to twenty years.
If we draw a trend chart for China’s economy in the past ten years, we will get two wave crests, which are “two overheatings”.
The first overheating appeared during 2004 and 2007. The US underwent the great real estate plus financial bubbles, resulting a overheating all over the world. China’s export volume increased by 30-40% on a yearly basis. After housing system reform, the local government tended to be keen on land finance. Enterprises invested in real estate, and so did the local government. Consequently, the economy was overheated quickly.
The second overheating lasted from 2009 to 2010. With the widespread outbreak of the global financial crisis in September 2008, China’s economy slipped badly, experiencing negative export growth. Large quantities of migrant workers returned home, and its economy was faced with the threat of a hard landing. Under this circumstance, the Chinese government launched ten measures to further expand domestic demands and boost a steady and relatively rapid growth of its economy in November. It was estimated that a total of 4 trillion yuan was invested as of the end of 2010. It was interpreted as the “4 trillion yuan stimulus package” by the foreign media. With the fast promotion of various measures, Chinese economy stopped its downhill tumble, and even realized growth against the trend which stunned the world. Within the half year from the end of the first quarter to the third quarter of 2009, the Chinese GDP growth had a rebound, growing 8.9% from the valley bottom of 6.1%. One year later, its economy began to overheat, which was obviously characterized by the explosive growth of housing price. The government turned round to throw cold water on it. In April 2010, the government issued the house purchase quota policy, continuously suppressing the growth of housing prices.
The after-effects, excess capacity in particular, continue up to now after the overheatings. Behind excess capacity stand the bad debts, and behind these debts distressed enterprises. Why did the Chinese economy tend to overheat? The most important reason lies in the local government. When the economic crisis emerged in 2009, the local government borrowed a lot of debt. More debt means more investment, and the economy began to overheat. The underlying cause is that the local government doesn’t need to control the macro variables. Inflation, asset bubble and employment all fall into the responsibilities of the central government, while the debt problem of the local government will be solved by the central government in the end. This mechanism led to a special phenomenon for the Chinese economy: If we let it be, there will be a mess; and if we handle it, it will come to a deadlock. This circulation has been under way for so many years.
We have laid a good foundation over the past ten years. But because of the two overheatings, we have to take time handling the after-effects. If we continue reform and prevent an overheated economy, it is entirely possible that we can maintain a sound economic growth in ten to twenty years. Certainly, this growth should be normal, at the growth rate of 7%, 8%, or 6%. Only when China has stepped over the stage of middle income, can it really become a great power, with its people's living standard being at the international advanced level. The most important move is the reform of the market economy system to identify the dividends as far as possible. Education development is the priority. The Chinese people have huge latent knowledge capacity. Previously, we fell far behind, we didn’t innovate, and we had to follow others. But now we have learned a lot, we are increasingly getting closer to the leading edge, there are great possibilities for us to realize true innovations.