By  on September 22, 2009

BEIJING — China’s economy, temporarily stalled last fall by the global recession, is back on the upswing — but with an uncertain future.

Once the government withdraws or eases up on heavy stimulus spending in coming months and years, the economy will need to take a solid turn toward innovation and domestic consumption for long-term health and survival, government leaders and economists said. As Chinese workers grow wealthier, their expectations increase and exports decline, the country can no longer depend so heavily on manufacturing and foreign direct investment.

Chinese economists said the government is intent on changing the economic structure. But basic pressures like keeping tens of millions of uneducated laborers employed are difficult to overcome.

“China’s economic mode will gradually change, that’s for sure, but it won’t be too soon,” said Sun Wenkai, an economist with the Chinese Academy of Social Sciences. “Our neighbors, including Japan and [South] Korea, all went through this period of transition, and it wasn’t quick. An economy based on cheap labor cannot change quickly, at least not within 10 years. As long as we still have an advantage in our labor force, the economy will continue to rely heavily on exports.”

China’s years of double-digit growth ended abruptly last fall with the onset of the global slowdown, and its gross domestic product grew by just 6.1 percent in the first quarter of this year. Economic growth bounced back to 7.9 percent by the second quarter, however, resulting in 7.1 percent growth for the first half. Global economists now predict 7 to 8 percent growth overall by the end of the year.

“This unprecedented global financial crisis has taken a heavy toll on the Chinese economy,” Chinese Premier Wen Jiabao told the World Economic Forum’s summer meeting in Dalian on Sept. 10. “Yet we have risen up to challenges and dealt with the difficulties with full confidence, and we have achieved initial results in our endeavor.”

Still, said Wen, much work remains and China could potentially shift, increase and continue its economic stimulus spending to achieve results. Around the world, leaders are now faced with stabilizing rebounding economies while moving away from heavy government spending programs like those undertaken by China.

“The world economy is beginning to recover, although the process is slow and tortuous,” said Wen. “We can now see the light of dawn on the horizon.”

But questions remain about how much of China’s renewed economic vigor is due to government stimulus spending. Much of the two-year program is focused on basic infrastructure and employment programs, like building new highways and roads, in part to replace millions of jobs lost in the manufacturing sector. Though the government initially released few details about its stimulus spending, Wen said the program was widely misunderstood.

With the world’s economy still taking a bite out of global consumer demand, all eyes have turned to China, where new wealth continues to grow for millions and economic development is charging forward.

However, changing China’s economy from one based on manufacturing and exports to one more focused on consumption and innovation is no small task, as experts and leaders at the Dalian conference noted.

The Chinese consumer, experts said, is nowhere near wealthy enough or willing to spend enough to make up for the loss of the American consumer and sluggish demand amid the global financial crisis. Both China’s trading partners and its own government have high hopes for Chinese consumer demand, with a major part of the country’s $587 billion economic stimulus package flagged for programs intended to encourage its citizens to buy more. But the wealth and confidence needed to spend at high levels is still lacking, according to industry leaders and economists.

Per capita income averages just $2,000 a year across China, with wide gaps between rural and urban incomes. At the economic forum, global leaders said it will take years to close the gap and bring incomes up higher.

“It will take China some time to catch up with the United States, maybe in the next 100 years,” said Zhao Xiaoyu, vice president for operations of the Asian Development Bank in Manila. “We are about 100 years behind the United States.”

Even though it might not be ready to become the world’s consumer or even replace the loss of domestic demand that led to 70,000 factory closures in the past year, officials say China’s economy is well on the road to recovery from the global economic slowdown. Government officials point to recent economic indicators showing a rebound in growth, production and consumption.

“The achievements we have made are not something that dropped into our lap,” said Wen. “Rather, they are the results of the proactive fiscal policy and moderately easy monetary policy and the stimulus package that the Chinese government and people have pursued in line with the national conditions. China’s stimulus package focuses on expanding domestic demand and is aimed at driving economic growth through both consumption and investment.”

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