Challenge for Beijing as boom likely to continue

The Chinese economy has been surpassing expectations for years and the 2006 gross domestic product figures, released on Thursday, even beat the confident predictions made days ago by senior Beijing officials.

The 10.7 per cent increase in output in 2006, which topped Beijing’s forecast of 10.5 per cent, has now laid a new set of challenges at China’s door: the question of how the manage the fruits and burdens of continued double-digit growth.

A few years ago Thursday’s data and the superlatives that came with it might have prompted discussions over whether a “soft” or “hard” landing lay ahead. Now there is every expectation the pace of growth can be maintained.

Having successfully sailed through every challenge since the Asian financial crisis in 1997, the government is more confident than ever about maintaining annual growth rates of nine to 10 per cent over the next three to five years.

“The big headline remains: China is not slowing,” says Stephen Green, of Standard Chartered, in Shanghai. “Many of our proxies (for tracking the economy) show continued fast growth. Real import growth has revived; transport is growing strongly, as are retail sales, car sales, oil imports and power production. This does not smell like a slowdown.”

In some respects, the problems now facing the Chinese government are two sides of the same coin. The sustained economic boom has left the central government relatively awash in tax revenues but still unable or unwilling to spend the money on a host of problems that Beijing itself has identified as in urgent need of funding.

Chinese government revenues as a percentage of GDP dropped sharply in the first 15 years of the economy’s opening up after 1980, from 25 per cent to under 10 per cent, according to a report by Jonathan Anderson of UBS.

The tax-to-GDP ratio was even lower than the former Yugoslavia before its break-up, local researchers noted ominously at the time.

The privatisation of the rural sector and the collapse of large parts of the state-owned economy, combined with the absence of a modern tax system to go in their place, left the government starved of money.

That has changed, with the government gradually entrenching a system over the last decade that taxes the new economy. In the process, it now finds itself with real money to spend.

Xie Xuren, China’s tax commissioner, revealed this week that central government revenues had risen by 22 per cent year-on-year in 2006, slightly faster than the rate of increase in 2005, and well ahead of GDP growth.

The GDP in three provinces, Guangdong, Zhejiang and Jiangsu, which collectively form the heart of the local private sector, grew by up to three points faster than the national average, which was in turn reflected in their taxes paid.

As a result, the government has been able to start planning to spend in the areas that have not benefited from the boom of the last decade – on the health and education systems, and in impoverished rural areas.

But the spending has so far been relatively modest compared to the rise in tax revenues and the rhetoric that has accompanied the marketing of new policies as reaching out to the less well off.

The government announced to great fanfare a “new deal” for the countryside last year, but the budget in May only increased spending for rural programmes by about 14 per cent.

Niu Li, a researcher at the State Information Centre, a planning agency think-tank, said that despite the rising tax take the government “will only gradually increase its spending on public services, as the old fiscal system has not been fundamentally changed”.

The central government neither seems to trust local officials to spend such monies properly on rural infrastructure, or new schools and hospitals, nor do they think they have the capacity or skills to do so.

“Even if the government sets out a big target for spending on public sector, the investment will be discounted during the implementation,” said Mr Niu. “Improvement in medical care and education is hard to quantify.”

The next indication of how the government plans to spread the largesse afforded by stellar GDP growth comes in March, when Wen Jiabao, the premier, releases the annual budget at the National People’s Congress.

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