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China's economy in 2004: Dimming or
brilliant?
By Macabe Keliher
SHENZHEN - Three hundred and eighty pounds of
salad oil used to cost Hsu 1,322 yuan (US$160). In
November he paid 1,672 yuan (US$202) a 26.5 percent
increase. Fifty pounds of noodles usually costs him 51
yuan; last month it cost 65 yuan, a 27.4 percent rise.
Rice too jumped from 0.82 yuan a pound to 1.01 a pound,
a 23 percent increase. Indeed, across the board, staple
food products rose an average of 17.88 percent in
November for Hsu, the operations manager of a listed
Taiwanese company invested in China.
"They say
it is because of floods and droughts, but you can never
be too sure with authorities here," he says drawing on
15 years of experience in China, and asking not to be
identified for fear of causing unnecessary trouble for
himself and his company by making critical comments.
Over that period, Hsu has never seen such price
increases, not even during the great floods of 1996.
Hsu is not alone. After 15 months of deflation,
and nearly seven years of price stability, China's
consumer price index showed 3 percent inflation year on
year in November, giving rise to concerns that China's
economy is overheating. Food prices were up an average
8.1 percent, with edible oil prices leading the rise at
27.2 percent, vegetables up 19.4 percent and grain up
10.8 percent, according to the National Bureau of
Statistics.
These cost increases in turn have
led to a rise in the cost of consumer services, such as
medical care, up 8.1 percent; utilities, up 4.6 percent,
and education, up 3.9 percent, according to Morgan
Stanley, a global financial services firm.
China's State Council's Development Research
Center says the price increases are due to grain price
hikes caused by production shortages, which, according
to the official Xinhua News Agency, "led to higher costs
for other commodities". Summer grain production dropped
2.4 million tons this year compared with last year,
which is only an "adjustment to the grain production
structure and [the result] of natural disasters", the
state-owned news agency said, quoting Zhang Liqun, a
senior researcher at the center.
Credible or
not, speculation abounds about the real causes of
inflation here. Hsu wonders if the People's Liberation
Army is not stocking up in preparation for war against
Taiwan. Op-eds around the country say that the war with
Iraq has affected supply chains, while a sociologist at
Renmin University in Beijing says that trucker strikes
in the north have kept supplies from getting to market
and thus driving up prices. Even foreign security houses
have added to the speculation about inflation: Citigroup
Global Markets blames it on the weather, while Merrill
Lynch says agricultural land is scarce because it is
being converted to industrial uses.
Overheated?
Regardless, rising prices
in China is a phenomenon Morgan Stanley chief economist
Stephen Roach has called "mildly disturbing" for the
very fact that it could indicate that China's economy is
overheating, which would lead to high prices, failing
industries, insolvent banks and a lot of very unhappy
Chinese people.
Industrial output reached a
nine-month high as of last November, representing an
increase of 17.9 percent over the same period in the
previous year. Xinhua quoted Tang Ming, chief economist
at the Asian Development Bank, as saying that the growth
rate of capital investment in China in the first three
quarters of 2003 was higher than the total investment in
the 1993 to 1994 overheating period.
Blackouts
around the country due to strains on the power supply
and continued investment in redundant capacities such as
steel, aluminum, cement and automobile manufacturing,
are further signs of a giant economy a bit too hot.
The property bubble now enveloping China has
already created overheating in at least one sector.
Property investment was up 34.9 percent in the first
quarter of 2003, far outstripping China's 8 percent GDP
growth. And while property speculators continue to drive
up prices, vacancies stand at an estimated 26 percent,
quadruple the American figure, eight times Hong Kong's
and 2.5 times the international norm.
Furthermore, new bank loans as of August last
year had already overtaken total new bank loans of 2002.
New loans in 2002 equaled 15.8 percent of total loans
for a total of 1.897 trillion yuan. As of August 2003,
total loans were up 23.9 percent for a total 2.17
trillion yuan, already surpassing total loans the year
before. China's central bank says that it would keep new
loans at around 3 trillion yuan, for a total rise of
22.8 percent - far surpassing last year - but officials
say 3.2 trillion yuan is more likely, and Citigroup
estimates that total loans for 2003 will exceed even
that figure.
Economists at Merrill Lynch say
that "excess capacity is being used up, bottlenecks are
beginning to emerge in key sectors (electricity, raw
materials, transport), and China's extended period of
deflation appears to be drawing to an end."
All the right moves
Merrill Lynch sees
such developments as a "natural outcome of China's
strong economic performance". In a report on China last
month, economists said they expect the economy to expand
by 11.5 percent in 2003, up from 11 percent in 2002 -
estimates well above the official 8.3 percent - and to
continue strong in 2004.
The government here is
not taking any chances, however, and has enacted
measures to reel in investment and engineer a soft
landing. In late September, the central bank raised the
reserve requirements on bank deposits from 6 percent to
7 percent, and subsequently tightened the scrutiny of
loans, especially those for real-estate investment. The
central bank also increased mortgage rates, especially
for luxury developments, and increased the lending rate
to property developers. Sources close to the banks say
these measures have led the big four state-run banks to
cut off lending altogether.
Whatever is
happening, "the medicine is working", according to chief
economist Roach at Morgan Stanley, who is upbeat about
China and a soft landing. Loan growth in October and
November was 80 billion yuan, down sharply from average
monthly gains of 275 billion yuan in the first three
quarters of 2003; fourth quarter credit growth was at
5.9 percent, down from 21.1 percent the year through
August; real-estate investment backed off over 2
percentage points in November; and Citigroup expects the
central bank to bring down the growth of the money
supply (M2) from 21 percent in 2003 to 18 percent this
year.
"The Chinese credit cycle has turned,"
Roach said.
Ghost in the
machine
Perhaps, but local governments may have
other ideas. Late last week, Beijing and Shanghai city
governments announced new rules facilitating property
speculation by allowing developers to sell apartments
before completion, the very thing the central bank was
trying to curb.
The moral here is that given the
size and diversity of the country, it is impossible to
talk about the economy or the investment sector as a
whole. Inflation in one area or industry of China may be
deflation in another - and explanations for inflation do
vary, after all. The property sector in Beijing and
Shanghai looks set to continue to overheat. But
manufacturing in Shenzhen is increasing at alarming
rates.
In fact, the International Finance
Corporation, the investment arm of the World Bank,
estimates that China's manufacturing output will more
than double in the next three years, flooding the
markets with excess capacity and creating downward
pricing pressures, not inflation. This view is further
supported by the fact that non-food inflation in
November was only 0.3 percent year on year, and prices
of transportation and telecommunications equipment were
actually down 2.2 percent in the first 11 months of
2003.
So what does 2004 have in store for
China's economy? Merrill says inflation, Citgroup says
deflation and over-investment, Morgan Stanley says the
"greatest economic development story of the 21st
century" and the Chinese say no further prices rises.
They are all right, and they are all wrong; and it
doesn't really matter because foreign investment
continues to gush in, and exports out, and GDP rises.
Indeed, as Chi Lo, an economic strategist in Hong Kong,
says, "China won't crash because confidence remains
high; people are still crazy about China."
(Copyright 2004 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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