TV Interview: The Two Faces of China’s Economy

This is an interview conducted by Dong Fang, the host of the NTDTV program “Business, Finance and Politics”. He is talking to World Economy reporter Mo Yao.

Dong Fang: According to Chinese official economic data, China's number of exports is rising, foreign investment has achieved a record level and urban consumers, as well as people in other areas, spend a lot of money. Although several apex economists estimate that the Chinese economic growth rate will slow down in 2003, officials estimate that the GNP growth rate this year will still achieve 7.9%. According to this data, China's economic situation is extremely bright. But there is one point that is not understood. In the first 10 months of last year, the Chinese government's fixed asset investment increased to 276 billion US dollars: this growth rate is as high as 24%.

Mo Yao, if economic development is really that good, why did the Chinese government put massive funds on fixed asset investment, a measure to further stimulate finance?

Mo Yao: China's economy is characteristic of the two-track system. On one hand it shows development, appearing mainly along the coastal area and in the southern district, and portraying a buoyant and confident economy. On the other hand, the Chinese economy actually shows difficulties in making progress, mainly in rural and old inland industrial districts. The movement on the first track is good; in the first 10 months last year, export increased 20.6%, foreign contract investment rose 35% compared to the previous year, and actual direct foreign investment rose 20% and broke through 50 billion US dollars. But on the contrary, the second track looked very worrying, with critical unemployment, falling prices, surplus productivity, low quality production and too many limits from the strict bureaucratic system.

Dong Fang: It has already been 5 years since the Chinese government carried out expansionary financial policy. How do you perceive the effect?

Mo Yao: The purpose of the Chinese government's deficit policy is to stimulate economic development continuously, using methods - such as the construction of roads that connect cities and the countryside, power plants and irrigation systems - to balance the decline in the rural economy and create more employment opportunities. It is difficult to get a short-term return from these investments. There were frauds in many investments and a lot of the funds were wasted, but these constructions and transformations will possibly have a positive effect in the future. But returning to another point, a habit of depending on the government’s expansionary economic policy has formed and this certainly is not a good sign. Moreover, the government’s stimulation does not work as effectively as it did at the beginning. One more point is that banks in China have seriously bad debt problems, and they are still providing high-risk loans to state-owned enterprises without these debts being written off. That could initiate a financial crisis and will thus threaten the economy in the future.

Dong Fang: How is it possible to support continuous motivation towards Chinese economic development in your opinion?

Mo Yao: The enterprise rather than the country should be enabled to be the most effective investor. The goal of government direct investment is to establish a macroscopic foundation for the entire national economy, to create a good environment for other forms of non- governmental investments, and to promote individual and business investments. But at present, state-owned enterprises in China still hold monopoly status in some domains, for instance, telecommunication and transportation industries and so on. Inherited problems still exist. Banks are not willing to provide loans to civil enterprises and this is restricting private development in the economy to an enormous degree.

Dong Fang: In China's two-track economy, the overwhelming majority is in the second track economic domain of unemployment, poverty and social dissatisfaction. The disparity between the poor and the rich enlarges day by day in China and this will bring a negative influence to the long-term development of the Chinese economy. What is your view regarding the prospects of the first track economy, the extroverted economy of the coastal and southern areas, this year?

Mo Yao: The first track economy in China mainly relies on exportation, and the export increment of some industries will slow down because of global economic depression. According to data from a Chinese information centre, the government’s reducing of export credit loans, trade partners’ adoption of anti- dump measures and the war between the US and Iraq, could all cause a drop in export growth rate this year.

Dong Fang: Thank you, Mo Yao.

Chinese version available at http://www.yuanming.net/articles/200304/18890.html