China’s economic slowdown is unlikely to cause deflation, said Shen Minggao, Caijing’s chief economist. With a set of proper fiscal stimulus, China is well positioned to maintain relatively strong growth next year.
In the ninth issue of Caijing Macroeconomic Weekly Review, published October 20, Shen pointed out that due to the changes in the ownership structure of the economy, the latest slowdown will probably not intensify an over-capacity problem. Moreover, as this time external demand is expected to be weak for some time, the focus of fiscal stimulus should be on encouraging consumption, which if successful may bring extra GDP growth of over 1.5 percentage points.
Since 1978 when China embarked on market reforms, the nation has experience two economic downturns because of weakening external demand. The first occurred after the Asian Financial Crisis in 1997. The second is occurring right now. Prior to both, the Chinese economy had been “overheating,” growing at a rate that many believed was unsustainable.
The conditions now, though, are different than they were in 1997. First, China’s dependency on export is rising. The export to GDP ratio was 19.2 percent in 1997 but 37.5 percent in 2007. Over the same span of time, net export to GDP also rose from 4.3 percent to 8.1 percent. Last year, net exported accounted for nearly one fourth of GDP growth.
Second and more importantly, the ownership structure of the national economy has changed since the state-owned enterprises (SOEs) restructuring process started in late 1990s. Of the urban fixed asset investment (FAI), the share of those invested by SOEs and state-controlled shareholding enterprises has fallen from 60 percent in 2004 to 40 percent in the first half this year.
Compared with SOEs, non-SOEs are more vulnerable to economic fluctuation, but they react and readjust their businesses more swiftly. When growth slows, the inertia SOEs’ expansionary strategy may result in...