Zhang Monan

Crucial period for economy

By Zhang Monan (China Daily)
Updated: 2011-05-10 07:54

Slower economic growth may help to smooth upgrading of development and overcome middle-income trap

China's slowed economic pace in the first quarter, as indicated by a slight decline in its investment, export and consumption growth, is a combined result of the country's changed internal and external economic circumstances as well as its ongoing policy adjustments and economic structural rebalancing. It is also the result of some congenital defects in the country's internal economic development and a "bottleneck" effect.

China's recent economic growth has been achieved in a severe external environment, especially since March. A slew of uncertainty factors - from Japan's nuclear radiation leaks, the tumultuous political situation in Libya and the sovereign debt crises of some nations, to rising global inflation pressures and divergences in the monetary policies of various countries - have once again cast shadows over the nascent and struggling global economic recovery.

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The uncertain external environment and dwindling external demand, together with all-inclusive macroeconomic policy regulation, have directly resulted in an economic decelerating in the world's second largest economy.

In a move to ease trade frictions with some of its major trading partners, China adopted a trade rebalancing strategy in the first quarter in a bid to boost imports, directly resulting in a trade deficit, its first quarterly trade deficit in six years.

At the same time, the adoption of a tighter monetary policy has played a big role in the decline in its investment growth rate. The strict measures to rein in the real estate sector, whose investment accounts for nearly a quarter of the country's total fixed assets investment and whose value accounts for about 6 percent of its GDP, also helped.

The growth rate of consumption has also slowed in recent months. Statistics show that the retail value of China's consumer goods grew by 16.3 percent in March from a year earlier, gaining 0.5 percentage points on the previous two months. But the figure was still 1.6 percentage points lower than the same period in 2010 and is actually much lower if the 5 percent quarterly inflation rate is taken into account.

The dampened demand in the real estate and auto sectors has contributed a lot to the decline of China's domestic consumption in the past few months.

In addition, the accumulated effects of the country's monetary policies are likely to produce some substantial influence on the country's future economic growth. China's central bank has raised reserve requirements for domestic commercial banks nine times since last year, bringing their reserve ratio to a record 20 percent.