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Chinese Economy Skyrockets in 2004; Growth Prospects Depend on Reforms


China's skyrocketing economy dominated the business pages in Asia during 2004. With gross domestic product growing by more than nine-percent during the year, more Chinese saw their purchasing power increase and Chinese businesses could expand around the globe. The country's leaders face a number of challenges in the coming year to prevent overheating and maintain growth.

A cashier at a busy Beijing department store uses a wooden abacus to tally the purchases of two customers who have just picked up a home entertainment system and an expensive flat-screen television.

One of the shoppers, Mr. Liu, who runs a small business, says China's economic growth has influenced his life. He has been able to buy a house and a car, and says he eats and drinks well, and enjoys the pleasures of life.

His friend, Mr. He, also a businessman, says he can even think about traveling abroad. Both men say they are more carefree about their shopping now than they were five-years ago.

As productivity rises, so do workers' wages. Incomes have risen not only in the industrialized urban centers along the eastern coast, but also in the inland rural areas, where the government says incomes jumped 16 percent this year.

Foreign trade continued to expand in 2004, with the government reporting that volume surged more than 35 percent in the first nine months of the year, compared with 2003. The Ministry of Commerce says foreign direct investment reached $60 billion, the highest ever.

But many analysts doubt the accuracy of the government's estimate of annual economic growth of about nine-percent. They say the formulas and the data used to compile that figure might be flawed. Some international economists think the figure is understated, which would mean the government has not been able to cool the economy.

Others think the number could be overstated. James Dorn is an economist and China specialist at the Cato Institute, a public policy research foundation in Washington. "It has probably been closer to about seven percent by reasonable estimates. But even so, that is a dramatic growth rate and it could be sustained for another decade or more if China undertakes the right structural reforms and allows further openness," he said.

Economists warn that some aspects of the Chinese economy remain fragile and that Beijing has not been able to slow growth enough. Excessive growth can create supply shortages, encourage reckless bank lending and spark inflation. China is already experiencing an electricity shortage, and consumer prices are rising.

One problem is over-investment in several sectors such as car manufacturing and housing, and related industries. Analysts say fixed asset investment slowed in 2004, but they say that at the current 26 percent, it is still too high.

To sustain growth, many economists say China must make more reforms, such as opening its capital markets and allowing a flexible exchange rate. The Chinese currency is pegged at a rate of about 8.28 to the dollar, a level many foreign governments and economists say is too low, unfairly making Chinese exports cheap on the international market.

China also has trouble getting other countries to recognize it as a market economy - which would make it harder to impose anti-dumping charges to block Chinese exports. Most nations consider China a planned economy, because the government dominates its financial system and vast state-owned enterprises receive subsidies and other business preferences.

But relaxing economic regulation presents a dilemma for China's Communist leaders because doing so could erode their power.

But Mr. Dorn says continued growth may depend on whether China undertakes more sweeping changes. "I think the major problem in China is [that] they have to have a significant political reform. That does not necessarily mean democracy, but it means a more limited government in which private property rights are protected by law."

The past year saw dozens of demonstrations across China, most often by people protesting the seizure of their lands for state-sponsored development projects. Thousands of people complained they were not properly compensated after corrupt officials and developers, often the party elite, pocketed money that was allocated for land purchases.

In a number of instances, the government used force to suppress these demonstrations, resulting in a number of deaths.

The problem is compounded by a growing gap between haves and have-nots. The World Bank says that despite China's economic boom, millions of Chinese still live on less than a dollar a day. Millions are unemployed.

China's leaders apparently recognize the need for more liberalization and in March changed the Constitution to protect private property. Analysts called the move - the first of its kind since the 1949 Communist takeover - a historic step in the right direction.

Beijing's other challenges include overcoming energy shortages and rising pollution caused by rapid growth.

China's ravenous need for energy also has forced it to look for fuel sources in other parts of the world, where it must compete with the United States and European nations.

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