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Optimizing economic structure for future growth
2005-10-10
China Daily
China should pay more attention to its industry structure if its economic development is to be healthy and sustainable.
In the mid 1980s, the World Bank and some domestic research institutes jointly conducted a study forecasting China's economy in 2000, concluding that the nation's goal of quadrupling its GDP in 2000 could be crushed by the energy bottleneck if China could not drastically reduce the percentage of its secondary industries and promote the growth of its tertiary industries.
China quadrupled its GDP earlier than the targeted date, largely thanks to the better-than-expected energy supply and improved energy efficiency.
Technological improvements and the dwindling percentage of heavy or energy-intensive fields among secondary industries contributed significantly to achieving the goal.
In terms of industry structure, the percentage of tertiary industries in the overall economy has dramatically increased, while the proportion of secondary industries has witnessed ups and downs over the same period - its percentage slid in the 1980s and then rebounded in the following decade.
In 2000, secondary industries accounted for 50 per cent of the overall economy, exceeding the number in the early 1980s.
China has made great strides to improve its resource usage efficiency in the past decade. However, the economy has once again been on a run of high energy consumption and low efficiency growth in recent years, chronically plagued by widespread power shortages.
Although China increased power generation capacity by more than 50 million kilowatts last year, 24 provinces still suffered from a severe power drought.
If this trend - the growth rate of energy consumption is more than twice that of economic growth - is prolonged, economic growth is doomed to fall back markedly as growth in the energy supply will be reduced due to a strain on resources.
Clearly, such a low efficiency growth approach is unsustainable.
Industrial consumption accounts for the lion's share of China's overall energy consumption. For example, 70 per cent of the power is consumed by industry.
So the dramatically increased energy consumption over recent years, especially in the past two years, indicates that something is going wrong with our industry structure.
The percentage of GDP accounted for by secondary industries was 41.6 in 1990, a figure that increased to 50.2 in 2000. Last year, the figure was 53 per cent.
Meanwhile, among increased industry output, heavy industry accounted for 60.9 per cent, 64.3 per cent, 67.6 per cent, and 70 per cent in 2002, 2003, 2004 and in the first half of this year, respectively.
Heavy industry occupies two-thirds of secondary industries as a whole, which in itself accounts for more than half of the overall economy, indicating that economic structure is over-reliant on heavy industry.
This structure manifests itself in many ways - such as the rapid increase in recent years in the output of heavy industry products that consume massive amounts of energy and mineral resources.
Steel output has dramatically increased from 107 million tons in 1998 to 297 million tons in 2004. Last year China churned out 930 million tons of cement, accounting for half of the world's total output.
Some say the development of heavy industry is a necessary phase that economic growth must go through, often citing Japan's post World War II experience to make their case.
Japan experienced a heavy industry boom after World War II. However, Japan's boom was driven by strong demand from the international market, created by the post war reconstruction efforts in countries ravaged by the conflict.
In this sense, Japan's post war heavy industry growth was the product of the favourable external conditions of the time, rather than an essential step.
Several factors have stimulated the development of heavy industry in recent years.
China's current heavy industry progress is also driven by strong market demand, which is the product of burgeoning domestic fixed investment.
As the urbanization process accelerates, investment in urban infrastructure and real estate is set to soar. The high household savings rate also makes the high investment rate sustainable.
Obviously, China's current high fixed investment growth rate will maintain its momentum for some time. Does this mean the current heavy industry boom is inevitable? Of course not.
Fixed investment is mainly being poured into urban property projects and urban infrastructure.
The housing reform releases long-suppressed house purchasing power, leading to urban property market overheating.
The proactive fiscal policy, which was adopted in the wake of the 1997 Asian financial crisis to stimulate then tepid domestic demand, is also to blame for the current fixed investment boom.
Due to its problematic complementary measures, the active fiscal policy stimulates the demand for engineering and investment projects while largely failing to meet its original goal. The surging demand in those engineering projects spurs the development of heavy industry.
Compared to GDP growth, the relatively slow increase in income among middle and low-income households is to blame for the lukewarm domestic demand.
It is clear that if macroeconomic policies are fine-tuned to spur domestic demand, there will be less need to stimulate GDP growth by increasing fixed investment. In this way heavy industry will not dominate economic structure to such a great degree.
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