Whatever Wen Says, China’s Economy Not “On Target”

State policies to boost internal demand to sustain economic growth appear to be failing.

Chinese premier Wen Jiabao said on Tuesday that his country is on track to meet its 7.5 percent growth target this year and could utilize government stabilization funds to sustain economic expansion.

Growth in China has slowed for six successive quarters and investors fear that it could slide into a seventh in the third quarter of this year, despite two interest rates cuts and loose monetary policies that make it easier for banks to lend. Chinese factories are running at their slowest rate of expansion since May 2009. Growth forecasts have been cut repeatedly.

Wen, speaking at a meeting of the World Economic Forum in Tianjin, insisted, “China’s economic development trend is good. Economic growth still remains within the target range set at the beginning of the year and the economy is stabilizing.”

President Hu Jintao warned this weekend though that the world economy is still hampered by the “destabilizing factors and uncertainties” of the 2008 financial crisis.

China pumped $635 billion in its economy that year, a stimulus package thrice the size of America’s relative to gross domestic product. Last week, it announced a further $150 billion worth of infrastructure spending.

The investments have failed to significantly reduce China’s logistical costs — the International Relations and Security Network’s Andrew Sheng and Xiao Geng point out that logistical costs in China are 18 percent of production costs compared with 10 percent in America — and may have fueled a housing boom which, if it pops, could be the greatest setback im Chinese development since the Cultural Revolution.

The stimulus also failed to lift internal demand which Chinese leaders recognize must increase as the country is losing its cheap labor advantage to other Asian nations and will therefore be able to profit less from exports in the near future.

“Expanding domestic demand is a long-term strategic principle and basic standpoint of China’s economic development as well as a fundamental means and an internal requirement for promoting balanced economic development,” said Premier Wen in March. But in order to truly diversify the Chinese economy, the internal market should be further liberalized. State subsidies for and support of financial industries, real estate developers and other vested interests with allies in the Communist Party should be cut and welfare spending increased to enable the Chinese to spend more and save less. Both will be difficult to achieve in the months to come as Beijing prepares for a leadership transition that starts in October.

A slowdown in economic expansion could undermine the party’s monopoly on power. China’s burgeoning middle class has largely accepted the lack of political freedoms while the economy was booming. But for China’s leaders to maintain high growth rates, they will have to relax their grip on power. The main impediment to economic development in years to come is the state’s heavy hand in industry. Behemoth state-owned enterprises, central planning, a weak judiciary, insufficient protection of private property and intellectual copyrights stand in the way of a freer market economy which the party isn’t sure if it willing to accept anyway.