[Outlook]Reshaping investment in China

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[Outlook]Reshaping investment in China

Amidst the global financial crisis, as China’s economic growth slows a variety of prospects on China’s economy in the future are presented. Because of the slowdown in the real estate market, exports and investment, the growth rate in the third quarter of this year was 9.0 percent. Investors outside China estimate China’s economic growth rate for next year to be at the 8 percent level.

Research institutes inside China estimate it to be 9 to 10 percent. If China’s growth slows down, Korea will certainly face serious difficulties as its economy heavily depends on China. Therefore, strategic entrance into the Chinese market is needed now. Resources for China’s economic growth were mostly investment and exports. Investment accounts for around 43 percent of entire capital, making the largest contribution to China’s growth. Exports are the second largest. Among entire investment, development of real estate accounts for nearly 19 percent.

China has five different economic regions and they have different growth engines. The southern China region of Guangdong Province is heavily dependent on labor-intensive exports. In the Changjiang economic region including Shanghai, domestic consumptions and investment lead economic growth there. In the Bohai-rim economic region of Beijing and Tianjin, real estate development and investment of capital led by state companies are major industries.

In the three Northeast provinces, investment in equipment manufacturers and renovation of state-owned corporations lead economic growth. In the middle west of China, regional development and investment in fixed assets serve as growth engines. Production in Shanghai, Guangdong Province and Beijing, the three major economic zones, account for 37 percent of the entire gross domestic product. If regional economies keep growing based on domestic consumption, entire country’s economy probably won’t slow down substantially.

China’s growth engine is still investment. If consumption continues to back up the economy, China’s growth rate can be the 10 percent level. Evaluations on local governments are based on economic growth based on investment and increases in tax revenues. Thus, local governments continue to increase investment as if competing against one another. Some local governments have a Chinese-style green development as growth engine.

Due to bankruptcies and a slump in the real estate market in Guangdong Province, the Southern economic area’s growth is slowing these days. As most companies in this region depend on exports, they are more sensitive to the global economy than in other regions in China. Companies used to make money from exports and invested the money in the real estate market. But now they are having a capital crunch because of a decrease in exports, an increase in costs of production and a limitation in loans.

As the slowdown in this economic region is due to exterior factors, rather than domestic reasons, the economic slowdown is likely to continue for a while there. But the Shanghai and Beijing region are more dependent on domestic consumption than on exports. Thus, its economy can grow nonetheless, if there is a policy to boost domestic consumption.

Just as China recently changed the goal of its policy from retrenchment to sustained growth and stabilized consumer prices, investment in fixed assets aimed at sustaining growth will likely continue. Particularly, demand for investment in infrastructure in the Middle West area grows and therefore the growth in the inland China is likely to continue to be two digits.

The problem is poor consumption. China’s domestic consumption decreases because urban workers save more than before as they feel insecure for the social welfare system and 700 million of rural population spends less than before. To better the situation, the Chinese government work to reform the insurance, housing and health care system for residents in urban areas, and carries out policies for agricultural industry, rural villages and farmers, in a bid to increase incomes in rural areas.

As for industry and trade, the manufacturing industry based on low labor costs is reaching its limitation and China pursues to increase trade within capital and technology-intensive industries which create high added values. If China’s structure is changed to expand domestic consumption, the frame for economic cooperation between Korea and China must be renewed and we should work to have dialogue for economic strategies by government officials and also businessmen in the private sector.

Korea’s investment and exports should be aimed at China’s domestic market. If we use different growth engines in different regions in China we will have opportunities to develop our economy and China can become our second domestic market.

*The writer is a professor of Chinese studies and the chairman of the Northeast Asia Economic Association of Korea. Translation by the JoongAng Daily staff.

by Yoo Hee-moon

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