When
China's economy sneezes ...
By Macabe Keliher
HONG KONG - Not since the great tea surpluses of the late 19th century has
China been able to command so much attention from the global economy for its
faults. Just as too many leaves in Fujian in the 1880s sent world prices into a
spiral, Chinese Premier Wen Jiabao shook the region's - and possibly the
world's - financial markets to the core last week when he emphasized the
government's determination to curb lending and said China would "take effective
and very forceful measures" to reign in a booming and overheating economy.
Fearing a slowdown in a country that could arguably be driving much of the
regional economy, investors sent Asia's financial markets and currencies into a
tailspin. Taiwan - one of the most heavily China-leveraged markets - shed
almost 8 percent after Wen's announcement last week, and Singapore was close
behind, losing 5.75 percent. Currencies came crashing down too: the Korean won
dropped 1.5 percent against the US dollar, and the New Taiwan dollar was down
by almost a percentage point.
Even the US markets suffered heavy losses. The Dow fell 2.4 percent in the
second half of last week, and the Standard and Poor's index fell 2.7 percent.
Although US macroeconomic indicators were not glowing - lower-than-expected GDP
(gross domestic product) growth, anticipated inflation, and expected
interest-rate hikes - pundits have fingered China as a plausible cause.
Excess capacity flooding the world market could have disastrous effects on
international trade prices. Further, in the past year China has taken in some
40-50 percent of Asia's exports, accounting for all of Taiwan's and the
Philippine's export growth last year and more than 50 percent each of Japan's,
Malaysia's, South Korea's and Australia's. Such intake has driven more than 7
percent of GDP growth in Taiwan, Malaysia and Singapore, 5.8 percent in South
Korea and 4 percent in Thailand, according to Union Bank of Switzerland (UBS)
figures (see
Replacing US in Asian export market, February 11).
Should China sneeze, investors worry, the region might get very sick. "China
has become very visible," says Chi Lo, a China strategist and consultant based
in Hong Kong. "It has created a fear among investors; an expectation even if
the actual material impact is not that great."
Applying the brakes
The Chinese government has moved cool down its red-hot economy. A 43
percent increase in investment in the first quarter this year, which helped
fuel a near 10 percent GDP growth, led the People's Bank of China to raise the
capital-adequacy ratio for banks a half a percentage point in April to 7.5
percent - the third time in six months.
Also, the China Banking Regulatory Commission announced this past weekend
that commercial lenders have stopped the approval of new middle- and long-term
loans. Last Friday the commission ordered the commercial banks to pull back
loans extended to rush investment and copycat construction.
Furthermore, in March the government made a list of construction and building
industries for which lending for new projects would be prohibited. Beijing also
increased down payments for investments in steel manufacturing from 25 percent
to 40 percent, and from 20 percent to 35 percent for cement, aluminum and
real-estate investments.
Overheated
China's economy officially grew nearly 10 percent last year, although many
foreign investment banks estimate the actual growth rate at 2 or 3 percentage
points higher. Although the government took some measures late last year and
early this year to cool the economy down, for all intents and purposes they
failed. In the first quarter of 2004, China's economy officially grew 9.7
percent, and the Ministry of Commerce said first-half growth would certainly
exceed 9 percent.
Investment growth this year has also skyrocketed: 43 percent year-on-year, its
highest growth levels in recent times, and almost three times the 25-year
average of 15 percent. In January and February, growth in 16 of 30 industrial
sectors exceeded 100 percent. Investment growth in iron and steel, construction
materials, and cement was as high as 170 percent.
But most troubling is the amount of "hot money" flowing into the country. On
speculation that certain sectors such as real estate will boom, and that the
yuan will revalue, foreign investors have pumped cash into China. In the first
quarter of this year, the country got US$30.9 billion in outside foreign
exchange, for an increase of 25.6 percent over last year. "If the surging
inflows of international hot money continue, China's money supply and
outstanding credit will keep expanding, resulting in the excess growth in a
handful of industries, causing further economic bubbles and increasing
financial risks," says Tung Chen-yuan, a political economist at the Institute
for International Relations, Taipei.
The steel industry, for example, will have the capacity to produce at least 330
million tons of steel by next year, an amount the country will not consume
until 2010.
Good timing?
Economists expect further curbs on lending for the overheated sectors, and
possibly an interest-rate hike of a half a percentage point in the second half.
Unlike the early 1990s when the government halted all new loans and recalled
outstanding ones, authorities have chosen to be selective here and go after the
culprit industries, the aim of which authorities hope will achieve a different
result than the deflation that occurred then.
The problem this time, however, is China's prowess on the world market. For
example, steel analysts estimate that if China's internal steel demand falls to
that of four years ago, there will be enough excess capacity on the market to
account for all of current international steel trade. This could cause a glut
so rich that prices would plummet below costs and destroy manufacturers
overseas.
But more so, if China stops importing at the same rate that it has been,
will the region stumble and fall? Probably not. Analysts estimate that it will
probably shave less than a half a percentage point off regional GDP growth. But
tell that to regional investors.
Macabe Keliher is an independent historian and journalist, and a regular
contributor to Asia Times Online. His website is
www.macabe.net.
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