ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintIcon Twitter
 (placeholder image)
Car dealers and customers walk at a second-hand car market near a newly-built residential area in Hefei, Anhui province, China.   © Reuters
Economy

China economist concerned by inefficient government investment

Central bank official sees multiple factors as 'favorable' for economy overall

| China

BEIJING -- China's economy has been a source of concern for the past few years, but now it is showing signs of stabilizing. A key question is whether policymakers can maneuver the economy into a solid recovery track by preventing the yuan from falling significantly and stopping a real estate bubble from forming. The Nikkei asked Bai Chong-en, an economics professor at Tsinghua University who serves as a member of the Monetary Policy Committee at the People's Bank of China, for his view on the issues facing the country and its prospects. 

Q: China's gross domestic product grew 6.9% from a year ago in the January to March period, representing two consecutive quarters of accelerated growth. What is your view on the current status of the Chinese economy?

Bai Chong-en, a member of the Monetary Policy Committee at the People's Bank of China

A: We can say that a favorable situation is being formed for the Chinese economy. First of all, exports are brisk. Growth is improving in North America and Europe, meaning the external environment is shaping up to be more favorable compared to the past.

Consumer spending is also playing a significant role as a growth driver. The improved social security system has enabled citizens to receive more services compared to what they paid into the system. As a result, individuals have more disposable income, which has become a factor driving consumption.

Q: Are there any aspects that worry you?

A: A sharp increase in investment led by the government concerns me. Investment in fixed assets, including plants and condominiums, increased about 9% in the January to March period. However, infrastructure investment for initiatives led mainly by the government has grown over 20%.

Some of the government's investment initiatives are very inefficient. Some local governments are also making investments solely to boost economic growth rates. For example, they tear up an existing road and just pave a new one.

Q: What is your outlook for the Chinese economy in the second half of the year?

A: I don't think export and consumption will slow down. However, the government can no longer drastically increase its infrastructure spending as it has been doing, and it should not. As investment slows, the growth rate will fall to some extent. But unless a major risk factor to the financial system becomes real, due to something such as confusion in the financial markets, China will not have a problem achieving the government's target of 6.5% growth for this year.

Q: There are still many people who think the yuan will fall further. What is your response to that?

A: I do not see any reason why the yuan's value may drop further. China has maintained a trade surplus. Although inefficient investment by the government remains a problem, there are many areas that actually need more investment. I do not see a situation in which a large amount of funds makes its way overseas. 

It is true, however, that there are various obstacles for overseas funds to be invested in China, and [some policies] make it difficult for money to flow into China. It takes time to eliminate these to prevent downward pressure on the yuan. In order to reduce the risk of capital flight overseas, we need to control capital flows in a cautious manner. 

Q: Aren't there bubbles forming, for example, in the real estate market, due to large amounts of money being trapped in China -- funds that have nowhere to go due to capital regulations?

A: Real estate prices are going up due to the entangled workings of different factors. I do not see capital regulations as necessarily being a particularly significant factor. 

Since China's housing environment has not improved to a satisfying degree, there is still [genuine] demand for properties. The problem is that supply has failed to catch up with this. To stem the formation of a bubble, we should introduce measures to address property demand by, for example, increasing the supply of land. We should also think seriously about introducing a property tax to discourage speculative property purchases.

Interviewed by Tetsushi Takahashi, Head of Nikkei's China Headquarters

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Try 1 month for $0.99

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world
.

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends July 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to Nikkei Asia has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media

Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century.

Celebrate our next chapter
Free access for everyone - Sep. 30

Find out more