By Maria Jesus Herrerias.

China’s Premier Wen Jiabao cut China’s growth target to 7.5 percent for 2012 in an attempt to achieve the promise of economic and welfare reforms for this year as well as to keep prices stable. With this statement, China’s government has abandoned the longstanding 8 percent goal, having achieved the lowest rate since 2004.

From my point of view, once again China’s government is focusing more attention on the numbers than the quality of these numbers. On the one hand, there is a marginal difference between 8 and 7.5 percent in a context that the secondary sector was growing at 10.6 percent and service sector at 8.9 in 2011, after the recovery of the global crisis (National Bureau Statistics of China). These figures should be considered ’normal‘ for an economy such as China –the most populous country in the world. So, it does not matter what the target is, the growth rate of the Chinese economy is always above the target. This is good for China and for its international reputation due the current expectations from Europe and the United States to reach agreements for their recovery.

What matters in fact is the quality of these numbers, or in other words the drivers of this growth. As is well-known, China’s government encouraged export promotion and capital accumulation as a priority in the achievement of fast growth. In some ways, this objective was met with the singularity of the geographical component. As other countries have done in the past, the agglomeration of economic activities has taken place around the coastal areas, thus creating regional disparities. This strategy of growth, likely feasible in early stages of economic development, creates two main problems. The first one is that China is an economy highly dependent on external demand, and the second is that there is an increasing level of inequality between regions (coastal vs. Western) or right now within the same province. It seems clear from the government that a set of reforms are needed such as the promotion of internal demand. In the current situation, where most of China’s trade partners are suffering the consequences of the economic crisis, it is crucial for the future of China to create incentives for the population to reduce the high levels of savings and to promote domestic consumption. Economic growth cannot rely only upon external demand, and both external and domestic demand should be balanced. This strategy of course prepares China for future externals shocks. The second problem has been persistent in the recent history of China and requires high quantities of ‘paracetamol’. A combined effort involving both local and national government is required and a detailed economic plan is urgently needed. From an economic point of view, the promotion of infrastructure, education, health, improving market mechanisms and the quality of institutions, all have been factors that have been useful in reducing inequality in other countries and could be implemented by China.

With the appreciation of Yuan, China has opened the door to other possibilities that were never thought of in the past. However, even though it seems rational in terms of the current strategy of the Chinese government, it is not clear what type of specific measures are going to be implemented to alleviate the economic situation. In addition, after thirty years of growth, China is not in an early stage of development and another set of economic reforms are needed to guarantee the sustainability of economic growth. An issue that is missing concerns the high degree of pollution and environmental damage or the observed increase in energy demand. China now faces a new scenario, where new incentives have to be created and other types of reforms needed to achieve its promise of welfare in 2012.

Maria Jesus Herrerias is Senior Research Fellow at the China Policy Institute, University of Nottingham.

Opinions expressed in the CPI blog do not represent the views of the China Policy Institute or the School of Contemporary Chinese Studies at the University of Nottingham. They are the personal views of the bloggers/authors.