China's annual economic growth target of about 7 per cent in 2015 is rational and necessary. As a developing country, China still has strategic opportunities, and its investment and consumption remain two effective growth boosters despite weak demands for its exports.
Some of its industries may be outdated or burdened with overcapacity as their comparative advantage fades away, but many more must be upgraded from the lower end to the middle and higher ends of the industrial and value chains, which requires large and accurate investments. A rational solution to the environmental pollution too rests with investments in advanced equipment and production methods, rather than closing down the factories.
The Chinese government's debt accounts for only about 40 per cent of GDP, while the ratio exceeds 100 per cent in many other major developing and developed countries. It means China has more room to use its fiscal policies to stoke growth. Besides, Chinese people's savings ratio is the highest in the world and China has the largest foreign exchange reserves.
These favourable conditions make it easier for China to use the good investment opportunity offered by the global periodic downward pressure. Accurate and efficient investment creates jobs, and more jobs mean higher consumption. And since robust consumption also attracts new investment, China can realise this year's growth target of about 7 per cent, a rate that would also ensure enough jobs are created in the years to come.
Yet a 7 per cent growth rate is not that easy to achieve this year. Some factors have to be addressed to prevent China's economic policies from being led astray.
First, many have said the growth rate should be compromised to fight pollution and clear the smog covering many Chinese cities. But air pollution is not caused only by economic growth. India's economic growth has been slower than China's over the past 36 years, but air pollution in India is hardly better. Coal is vital to the advantages the Chinese economy enjoys. But it is more polluting than oil and natural gas, and China has enjoyed its benefits and suffered its harms. The fact is, the faster China grows, the earlier it will bid farewell to the lower-end manufacturing phase and the heavy pollution associated with it.
Second, some people attribute the overcapacity in some industries to investment, and propose higher consumption to boost growth. Since the overcapacity comes from the iron and steel, cement, electrolytic aluminium and glasses, investments to further increase these industries' production capacity should be reduced. And the saved funds should be used for the technological upgrade of and to promote innovation in these industries, and for environmental protection and infrastructure construction. What China needs is more efficient and accurate investment.
Third, many say the government should not pass any more proactive fiscal policies or increase currency supply. Some economists' studies show the government's investment return ratio from 2008 to 2012 was markedly lower than that for enterprises' investment, and argue that China should cut government investment and encourage enterprises to invest more. The fact is, the government's proactive fiscal policies in 2008 and 2009 were necessitated partly because of enterprises' reluctance to invest, and most government funds have gone into infrastructure, whose returns are realised later than those for enterprises' investment. The economists have certainly failed to see the importance of government investment for the entire economy.
Poor infrastructure has become a big growth hindrance for many developing countries. The Chinese government is thus right to use limited investments to improve the infrastructure that will benefit society and the market in the long run. Keeping this in mind, it is time to take advantage of the low prices of building materials to expand and strengthen China's infrastructure.
The author is former chief economist and senior vice-president of the World Bank. The article is an excerpt from his speech on the Chinese economy at Peking University on March 14.