China makes headway in transforming growth model

China has made substantial achievements in transforming its growth model and rebalancing its economy which used to be driven largely by exports and investment, scholars noted.

Eswar Prasad, a professor at Cornell University and a senior fellow at the Brookings Institution, noticed China's big shift in the composition of domestic demand as consumption has replaced investment to become the dominant contributor to growth.

"Private and government consumption together accounted for more than half of China's output growth in 2011-12, signaling a big shift in the composition of domestic demand," Prasad said in an article titled "Beijing's steady progress towards rebalancing" published by Wall Street Journal(WSJ).

He also said that physical capital investment, the main driver of growth over the previous decade, is no longer the dominant contributor to growth.

The revised figures from the new edition of the China Statistical Yearbook showed that consumption contributed to 55.5 percent of China's growth in 2011, while investment contributed only 48.8 percent.

An article titled "Rebalancing China: China's consumer-led growth" carried by The Economist also recognized Professor Prasad's point, adding "If the pattern holds, China's growth will be no longer investment-led nor export-led, but consumption-led."

Data released by the National Bureau of Statistics (NBS) last month showed that final consumption contributed to 51.8 percent of China's economic growth in 2012, outperforming capital formation which accounted for 50.4 percent of the growth.

Tom Orlik, a leading economist specializing in China's economy, also confirmed the bigger role of consumption in China's growth, adding that there are tentative signs of a shift to a more-balanced economy in China.

"Industrial output has clawed back; in December it was up 10.3 percent from a year earlier, compared with an 8.9 percent pace in August in 2012,"Tom Orlik noted in an article titled "Give China Time on Rebalancing Risks" published by WSJ.

He added that China's smooth economic recovery has boosted people's confidence in the stock markets. The Shanghai Composite Index rallying more than 20 percent from its December low.

There are other signs of progress on domestic rebalancing as well. Professor Prasad said that the decline in the share of private consumption in GDP has been halted. The share even went up slightly in the last two years. Consistent with Chinese government's objective of promoting the services sector, employment in this sector grew faster in 2012 than in the industrial sector. The shares of these two sectors in GDP are now equal.

As for exports, Prasad noted that a shrinking trade balance has in fact dragged down growth these past two years, adding China has made substantial progress in reducing its external imbalances.

The ratio of China's current account surplus to its GDP dropped to 2.6 percent in 2012 from its peak of 10.1 percent in 2007, according to the government figures. China's trade account surplus has also shrunk steadily and markedly relative to its peaks in 2007, when it hit 7.6 percent of GDP. In 2012, its surplus was below 3 percent of GDP.

The statistics demonstrated that China has made headway in adjusting its economic structure, with domestic consumption serving as the major driving force, according to NBS chief Ma Jiantang.

China's central bank governor Zhou Xiaochuan said that this was a result of the country's policy to promote structural adjustment and boost domestic demand.

He said that the successful transformation owes to the country's measures to seek stable growth in face of the global economic downturn, such as easing restrictions on capital inflows and outflows, spurring demand in rural areas, promoting the services sector,and so on.

Prasad also has the same point as Zhou's as he said that the government has eased restrictions on capital inflows and outflows, allowing Chinese investors and corporations to look to foreign investments for diversification purposes.

Last month, China's foreign exchange regulator announced that it has set up an office named SAFE Co-Financing to handle trusted loans of the country's foreign exchange reserves."It provides a sound foundation and environment for domestic financial institutions and forex market entities to expand their businesses and trade overseas," according to the State Administration of Foreign Exchange (SAFE) statement.

Capital outflows exceeded inflows in 2012, something not seen for over a decade.

This has raised concerns about capital flight. But Prasad said that the reversal might simply reflect a maturing, richer economy with more open financial markets that allow investors to take advantage of diversification opportunities.

With growth recovering and inflation low, China has a golden opportunity, world leading economists agree, adding that China should look beyond short-term demand management and focus instead on improving the balance, quality and sustainability of growth.