POINT OF VIEW/ JUNYA SANO: China's NPC pushes sustainable growth

At China's National People's Congress (NPC) in March, slightly strong concerns were expressed about inflation. But the main theme of the government's economic management policy was sustainable economic growth, including plans for the continuation of fiscal and monetary policies and for a shift to a new growth pattern.

The Third Plenary Session of the Eleventh NPC was held from March 5 to 14.

While the basic economic management policy for the year is effectively decided at the Central Economic Work Conference held at the end of the previous year, concrete numerical targets, budgets and economic development plans need to be officially announced and approved at the NPC.

For that reason, the NPC is one of the most important conferences in analyzing China's economic outlook.

In addition, concerns about inflation and soaring real estate prices have become more pronounced since the start of 2010.

Under these circumstances, one of the most closely watched aspects of this year's NPC was the extent of revisions to the economic management policy of prioritizing sustainable growth.

Judging from the Report on the Work of the Government and other reports, the characteristics of the economic management policy presented at the NPC can be summarized in the following three points.

First, slightly strong concerns were expressed about inflation and rising real estate prices.

The government set a target of around 3 percent for an increase in the consumer price index for 2010.

It is higher than not only the actual figure for 2009 but also the level since the start of 2010.

The phrase "keeping the overall level of prices stable" has been added to the Report on the Work of the Government and other reports.

It appears that the government's determination to keep commodity prices stable has strengthened since the Central Economic Work Conference at the end of 2009.

Further, the resolve to curb soaring real estate prices was expressed in a strong manner, although it was limited to some cities.

At a news conference during the NPC, Zhou Xiaochuan, governor of the People's Bank of China, China's central bank, expressed his concerns about inflation. However, he commented that caution will be required when the government shifts from policies in response to emergencies to policies in response to normal circumstances.

His remarks suggest that the government is not disposed toward any drastic change to tight monetary policy.

Second, the government reaffirmed its intention to continue to implement policies geared toward sustaining growth.

The government set a target of around 8 percent for the economic growth rate for 2010.

A slightly lower target could have been set because the target under the Eleventh Five-Year Plan covering 2006 to 2010 was an annual average of 7.5 percent and because the actual growth rate was well over that target from 2006 to 2009.

The target was set at around 8 percent probably because the government concluded that this level of growth will be essential in the creation of new jobs.

In fiscal and monetary policies as well, the priority will continue to be supporting economic growth, not reining it in.

Fiscal policy will continue to be aimed at stimulating growth, and the fiscal deficit in 2010 is expected to be the biggest ever, at 1.05 trillion yuan ($840 million or 78 billion yen).

Much of the budget will be earmarked for the completion of priority projects and the continuation and expansion of measures designed to encourage consumption.

In terms of monetary policy, a target of around 7.5 trillion yuan has been set for new lending for the year.

The figure is below the 9.6 trillion yuan worth of new lending in 2009, but well above the levels of 2007 and 2008, when a tight monetary policy was in place.

Third, the government presented concrete plans for the switch in the growth pattern, or growth engine.

The Report on the Work of the Government calls for aggressive expansion of private consumption.

In addition to direct measures, such as the continuation and expansion of government subsidies in support of new and replacement purchases of household appliances and automobiles, the report included initiatives to help increase the incomes of low-income earners and farmers by raising the minimum standard of living and pension payments.

Elsewhere in the report, initiatives to "improve people's lives," such as reviewing income distribution and correcting income disparity, were described as "the driving force of economic development." It is clear that the government considers these measures as contributing to the sustainable expansion of overall consumption.

With regard to investments, the government made clear that it will strictly screen new projects although it remains committed to carrying out priority projects.

In the National Economic and Social Development Plan, reported at the NPC on March 5, the target of 20 percent was set for a year-on-year increase in total social fixed asset investment, significantly lower than the increase of 30.1 percent in 2009.

It would be reasonable to understand that from the perspective of sustainable growth, the government aims to switch the growth pattern from one led by investments to one led by consumption, as the percentage of private consumption in gross domestic product has fallen.

At a news conference following the closing of the NPC on March 14, Premier Wen Jiabao commented that China is not immune from fears of a double-dip recession of the global economy, and that economic recovery depends greatly on policy measures and cannot be considered self-sustaining.

It must be said that the news conference strongly reflected the government's cautious economic forecast and its intention to continue with policies designed to sustain economic growth.

China's biggest challenge in switching its growth pattern, while maintaining an economic growth rate of 8 percent, is whether it can deal with inflation and soaring real estate prices appropriately.

The government has been gradually tightening controls, by absorbing excess liquidity and ordering 78 state-owned enterprises whose main business is not real estate to withdraw from real estate operations, among other measures. These progressive reviews, or fine-tuning, are expected to continue for the time being.

Still, the risk remains that the government, which has expressed its intention to maintain an appropriate easy monetary policy, may miss its chance to implement measures to prevent inflation.

On the other hand, there is a danger that early and overly simple measures to curb price increases may disrupt the pace of economic recovery.

The government faces a similar dilemma regarding control of soaring real estate prices.

The Hu Jintao administration needs to work even harder to produce a balanced economic management policy that can deliver both sustainable growth and stable prices, by taking economic indexes and public opinions into account.

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Junya Sano is a senior researcher at the economics department of the Japan Research Institute.

This report was published in the May 2010 edition of Asia Monthly, an English-language publication of the institute. It is available at (http:/www.jri.co.jp/English/periodical/asia/).