Adjust policy for new phase of growth

Zhang Xinze, China Daily, Asia News Network, Beijing

From the perspective of a long-term economic cycle, China's economy is currently at the stage of gaining momentum. Meanwhile, the problem of structural imbalances are becoming apparent at this phase.

The economic long waves theory holds that in an industrial society, every round of technological innovation heralds a long period of robust economic growth. Within the long wave period, which can be subdivided into rising and declining periods, the economy alternately accelerates or slows down.

The general waves have historically lasted for 50 to 60 years in the first rank of industrial nations. Lately, as developing countries have adopted overtaking strategies to accelerate their development, they have introduced many advanced and mature technologies, which have shortened these cycles.

Domestic scholars hold that starting from 1980, China entered the fourth long wave cycle since the 1880s.

Since that year, China has witnessed prosperous economic growth in the wake of its adoption of the reform and opening up policies.

Until the early 1990s, the Chinese economy had the characteristics of the rising part of the long wave period: It witnessed a high economic growth rate, continual price hikes and handsome corporate profits; new firms kept emerging; and the unemployment rate was low while credit grew rapidly.

From then until 2002, things have changed. Overcapacity had been a headache for many industries, which suffered from weak domestic demand.

During that period, which is deemed as the declining part of the long wave economic period starting from 1980, the economy was not as active as in the previous decade. Prices were low and enterprises suffered from decreased profits. There were less new enterprises and unemployment pressure was intensifying.

But since the second half of 2002, the economy began to gather steam.

Now the latest figures show that China's gross domestic product has grown by a sizzling 9.1 percent in the third quarter of this year. Fixed asset investment has grown by more than 30 percent in the first three quarters.

The broad measurement of money supply, M2, which includes cash in circulation and all deposits, grew by 20.7 percent year on year by the end of September. Loans increased by 23.7 percent during the same period.

It is therefore reasonable in this condition to predict that the economy is stepping into the rising part of another long wave period of high growth.

Automobiles, electronics and real estate may become the pillar industries that bolster economic growth in the nation.

People's demand for cars and better houses continue to grow as their living standards improve. Such demand will boost the development of the auto and real estate industries, which will in turn bring along the high-rate growth of related industries, such as steel and iron, components, and building material production as well as machinery manufacturing.

The electronics industry will grow quickly as the society becomes more technologically inclined.

Governments at all levels have focused their development strategies on that industry, and both State and private enterprises are investing heavily in it.

As well, the restructuring of traditional industries, such as those carried out in the traditional industrial powerhouse of Northeast China, will depend heavily on the growth of the electronics industry.

Given the strong driving force of those three industries, the economy will see a boom in the coming years, which will ease the current pressure from sluggish domestic demand, low price levels and unemployment.

But according to the long waves theory, structural imbalances occur while the economy expands.

The development of the pillar industries which will bolster the long wave economic boom will lead to expanded investment and increased bank loans. At the initial stage, this is healthy. However, as the trend goes unchecked, it will cause expansion of other general industries and lead to excessive price hikes and over-speculation, hence the problem of structural imbalances.

There are signs that the track of over-production has appeared again since the second half of last year.

Take the aluminum industry for instance.

Its production capacity was 5.1 million tons last year. The market sales were 4.14 million tons. However, 2.6 million tons of production capacity is under construction and another 4 million- ton-level projects are being planned.

In the steel and iron industry, investment grew by 150 percent in the first three quarters. Investment in the coal industry increased by 52 percent and that in the textile industry grew by a stunning 626 percent.

Judging from the current situation, duplicated construction has taken shape in some industries. A large amount of bad assets is set to emerge in the coming years.

What we should do now is make efforts to lessen losses in the future.

A major problem is that the government and banks have held an over-optimistic view of the economy, which has led to easy macro- policies and an excessive money supply.

Policy-makers should adjust the economic policies to ensure that on the one hand, those pillar industries can grow healthily and on the other hand, the money supply will not worsen structural imbalances.

The writer is a researcher with the Statistics Department of the People's Bank of China.