Red-hot China set to cool a touch in 2006
(Reuters)
Updated: 2006-01-18 07:31

SHIFT TO CONSUMPTION

HSBC economist Qu Hongbin said he too expected another strong year for China in 2006, with growth likely to be only half a point lower than last year.

But he said China faced an urgent task to tilt growth toward consumption and away from investment, which he said had accounted for about 60 percent of GDP growth in the last three years.

Qu told a news conference in Beijing that the government should take the lead by redirecting its own spending from physical infrastructure to areas like education and healthcare.

This could help boost China's consumption-to-GDP ratio by 3-4 percentage points and give consumers a reason to spend more and save less.

"It's a challenging task but that shouldn't be an excuse for China not starting on it right now," Qu said.

Tax chief Xie said tax revenues grew by 20 percent in 2005 to 3.09 trillion yuan ($383 billion). Higher revenues could give Beijing more leeway to rebalance the economy using fiscal policy.

China has already raised income tax thresholds, scrapped the country's 2,600-year-old farm tax and promised to abolish rural school fees to try to put more money in people's pockets.

Weaning the economy off exports and related investments would reduce China's vulnerability to the sort of trade tensions highlighted by Yi, the vice commerce minister.

Critics, particularly in Washington, charge that China's ballooning trade surplus, which more than tripled to $102 billion in 2005, is a major source of global economic imbalances and is underpinned by an artificially weak currency.

Some economists expect the trade surplus to drop to about $100 billion this year, which they say would probably not be enough to reduce U.S. pressure on Beijing to let the yuan appreciate more quickly.

Since China revalued the yuan by 2.1 percent against the dollar in July and adopted a managed float, it has let the currency rise 0.54 percent against the U.S. currency.