News hot and cold for China's
economy By Jayanthi Iyengar
PUNE - China has always been the big loose
economic cannon in Asia. After the Beijing government
stepped in and ordered macro-controls to ease
inflationary pressures by cooling down the real-estate
and infrastructure sectors this spring, China is now
signaling a mixed picture of results. This seems to
indicate that the economy is slowing down, but perhaps
not as fast as was expected - or as fast as desired.
Further, though Singapore, Malaysia and the
Philippines have posted unexpected positive growth in
the second quarter, raising hopes of growth outside
China for some countries, the regional feedback
indicates that a slower China would still continue to
preoccupy cautious investors both in the current and the
coming years.
China's own economists are worried
about the effectiveness of the government's
macro-controls. On Tuesday the official Xinhua news
agency said, "Experts have warned against a possible
relapse into hectic investment growth, as investment in
some sectors of the economy remains too strong."
According to the National Bureau of Statistics,
investment in the overheated steel, cement and aluminum
sectors - targeted for much slower growth - did indeed
slow from January through July, but growth remained
above 50%, a troubling figure and far higher than the
average national investment growth, the news agency
reported.
The Asian Development Bank's (ADB's)
Asia Economic Monitor for July upgraded China's growth
figures upward for the year, as compared with the
December 2003 forecast, but this projection is lower
than the 9.1% growth the Middle Kingdom actually notched
in the previous year.
Pradumna B Rana, director
of the ADB Regional Economic Monitoring Unit, who spoke
at length to Asia Times Online on Chinese and East Asian
growth, explained that the economic activity in the
People's Republic of China (PRC) is cooling off as a
result of the government's efforts to rein in
fixed-investment and gross domestic product (GDP)
growth.
He pointed out that the
credit-tightening measures initiated since the second
half of last year are gradually slowing bank loans,
money supply, fixed investment, and industrial
production. Household consumption is expected to
maintain last year's momentum, while fixed-investment
growth is expected to moderate somewhat this year from
the very strong 27% rate seen last year.
"As a
result, although PRC's GDP growth forecast for this year
has now been upgraded to 8.7% [from the 7.6% December
2003 forecast], it will represent a slowdown from the
9.1% growth posted last year. A further cooling off of
the economy next year is now envisaged, as
fixed-investment growth continues to slow and the United
States economy settles down to a more sustainable
growth. Thus GDP growth in 2005 is forecast to be lower
at 7.7%," he said.
Growth of 7-8% would be
ideal, but fanciful Officials at both the ADB and
the World Bank had previously told Asia Times Online
that a 7-8% annual growth rate is considered ideal for
China's economy.
The International Monetary Fund
(IMF), which released its report in late August, and
hence had more recent figures on which to base its
predictions, was more cautious. It noted that China had
skillfully tried to manage its economy and had cut the
risk of overheating. Yet concerns remain about how soft
the landing would be. "A crucial short-term concern is
that despite the recent indications of moderation in the
fast pace of investment and economic growth, a soft
landing of the economy is not yet assured," the
multilateral agency said in its annual review of the
Chinese economy.
Steven Dunaway, the IMF's
mission chief for China, speaking to reporters soon
after release of the report, said experience elsewhere
showed that administrative measures such as those
applied by the Chinese had a tendency to dissipate over
time, either because they were relaxed or people found
ways to circumvent them. "So our concern is more focused
on excess liquidity in the banking system, and if the
administrative controls become less effective, credit
growth could take off again," he said.
China
figures paint mixed picture The Chinese
government has been steadily releasing the first seven
months' growth figures during the past two months. These
figures have reflected a mixed growth picture, which
makes is difficult to conclude yet that China is slowing
down to the desired level. Further, the National Bureau
of Statistics (NBS) has been revising upward the figures
from last year and last quarter. This has made China
watchers nervous as:
The Chinese figures are suspect as it is.
The upward growth revisions coincide with the period
when the Middle Kingdom experienced severe acute
respiratory syndrome (SARS), which was a considered to
be a period of slow growth.
The upward revisions have the effect of making the
current year's growth look smaller as compared with the
previous year, since the comparisons are made on a
larger base.
The figures being released by the
Chinese government fall into two categories, positive
and negative. The positive figures seem to reflect the
fact that the engineered slowdown is beginning to work,
while the negative figures seem to signal that the
impact is still not strong enough.
On the
positive side is the GDP growth figure. Investors were
relieved when the NBS pegged second-quarter year-on-year
growth marginally lower at 9.66%, as compared with 9.8%
in the first quarter and 9.1% in 2003. Unfortunately,
the second-quarter figures now stand revised to 9.69%, a
little higher than earlier. Further, 2003 growth figures
have been revised upward, though no one knows by how
much, as government officials are not sharing details
with the public.
Investment in China's property
sector grew 28.6% year on year in the first seven months
of 2004, representing a 5.5-percentage-point drop on the
growth rate posted last year. Automobile output and
sales in China plunged in July by 15.48% and 8.98%
respectively as compared with June. Growth in broad
money supply measured by M2, which is a measure of the
liquidity in the system, had cooled to 15.3% year over
year in July, down from 16.2% in June and 19.0% in the
first four months of 2004. Growth of loans also
continued to decelerate in July, to 13.1%, down from the
20% averaged in the first quarter of 2004.
Industrial price inflation has steadied. Also,
industrial production growth slowed for the fourth
consecutive month in July, to 15.5% year over year, from
16.2% in June. From January to July, China's gross
amount of import and export reached US$623.1 billion, an
increase of 38.3%. The export value was $309.1 billion,
35.5% higher than last year, and imports witnessed a
growth of 41.3% to $314 billion.
On the
downside, FDI is way up On the negative side,
China attracted $4.5 billion in foreign direct
investment (FDI) in July, up nearly 46% from the same
period a year ago, though it was lower than
expectations. Investment in China's factories, roads and
other fixed assets rose 31% in the first seven months of
this year. Market expectation had placed growth in this
sector at 20%. Investments by state-owned firms
accelerated, from 25.5% in January to June to 27% in
January to July.
The growth of local-government
investment decelerated to 37.2% in the first seven
months, compared with 38.5% in the first half. Further,
inflation touched 5.3% in July, bringing it on par with
the benchmark one-year paper coupon rate - the cutoff
when investors and analysts expected an interest-rate
hike by the Chinese government to avert hoarding, which
would happen when inflation exceeded the real rate of
interest, causing a lack of interest in saving.
Brazil's Cia Vale do Rio Doce (CVRD), the
world's largest iron-ore producer, has recently
predicted that China will account for 36% of this year's
worldwide demand for iron ore, the main ingredient in
steel. The Baltic Dry Index, which measures the cost of
shipping coal, iron ore and other raw materials
globally, endorses such independent projections. It has
risen 61% since June 22.
Clearly China is
slowing down, but not at the rates expected. Further,
even at 9.66% growth - as compared with the earlier 9.8%
quarterly GDP growth - China is growing about 0.5%
higher than its 20-year trend and 0.6% higher than the
9.1% witnessed last year. To meet the ADB's forecast,
the Middle Kingdom would have to grow at 7.65% in the
next two quarters, which now seems unlikely to many
China watchers. Of course, this is good news for
commodity suppliers, who are locked into contracts in
advance, but bad news for those who don't have such
compulsions and would like to see their investments
safeguarded.
Further,
uncertainties are being introduced by external factors.
The United States' growth has been slower than expected.
Hence the US government may not continue with its phased
interest-rate hikes, which could suck some of the excess
liquidity out of the Chinese system, as higher intrest
rates in the US would lead to a reverse flight of
capital back to the US. A further unknown factor is
the galloping price of oil. All of these factors are
raising the possibility of investors looking at other
viable alternatives outside China.
East Asia the new mecca for wary investors? That brings us to the question as to
whether East Asia could be the new mecca for investors
wanting to shift investments out of China, or for those
looking for alternative investment avenues for fresh
investments. Also, there is also the million-dollar
question: What would be the impact of a slower China on
these countries, considering China sources raw material
in East Asia to add value and sell abroad?
Like
most East Asia watchers, ADB's Rana says the impact of a
more rapid slowdown in the PRC on other East Asian
economies would depend on such factors as the country's
trade dependence on the China, the type of products
exported to the Middle Kingdom, whether those exports
are for domestic consumption in China or for its exports
to third countries, and the effect of the PRC slowdown
on global growth and commodity prices. "It is,
therefore, difficult to quantify the full effects of a
slowdown in the PRC on neighboring countries," he said.
However, the fact does remain that East Asia's
trade integration with China has increased sharply over
the past few years. Last year, the Middle Kingdom
accounted for about half of the total export growth for
Japan, South Korea and the Philippines. South Korea's
exports to China rose 65% in 2003, making it the
former's largest export market. Logically, a sharp
slowdown in China, all things remaining equal, would
disproportionately affect countries that have derived
most of their recent export growth by selling to the
Chinese market. By ADB's estimates, exports to the PRC
as a share of GDP ranges from a low of 2% in Indonesia
to a high of 11-12% in Malaysia and Singapore,
reflecting their relative openness. In 2003, exports to
the PRC accounted for 6.5% of South Korea's GDP.
"However, it should be noted that an economic
slowdown in the PRC might not hurt its imports from East
Asia as much as one might expect because demand for PRC
exports from industrial countries will continue to be
strong. Hence PRC's demand for intermediate goods from
East Asia would still be resilient to its expected
slowdown," said Rana.
On the positive side, the
first-quarter growth for East Asia has been the fastest
since the second quarter of 2000. Further, data for the
second quarter generally suggest that growth in the
region continues to be robust, exceeding market
expectations, as reflected in the almost uniform upward
revisions of consensus growth forecasts for East Asia.
According to the Asia Economic Monitor for July, "The
most significant positive surprises were for Singapore,
Malaysia, the Philippines, and the PRC."
East
Asia enjoys robust growth This robust expansion
has been driven by a combination of a rapid increase in
exports and continued strength in domestic demand in
most countries. "East Asia's exports have benefited from
a confluence of strong global growth, a surge in import
demand from the PRC, and high commodity prices. A
revival of tourism has also boosted exports of services
in some countries," said Rana.
However, despite
several signs of revival, countries such as Singapore
have been worried about their survival in the more
competitive environment in Southeast Asia. Tan Khee
Giap, well-known Singaporean economist and a member of
the state-sponsored Economic Review Committee (ERC) set
up to look into ways of improving the island's
competitiveness, recently recommended a three-year wage
freeze and a freeze on all government charges and fees
in that country.
Gaip, who also heads the
Regional Economics Monitoring Unit at Nanyang
Technological University in Singapore, made the
statement to the Business Times on the sidelines of a
conference. He argued that the tinkering should be done
in the variable component of salaries, which is
permitted by law. The rationale was that the downward
trend could be used to push through a wage freeze and a
cost cut, as it would signal to the world that the
island state meant business when it came to managing
costs.
The country, which experienced 2% growth
in 2001 (the worst ever since its independence), after
10% growth in the previous year, has taken steps
recently to make its economy competitive by effecting
hefty cuts in corporate and personal income tax. Today,
cost-effectiveness is a major concern in Singapore,
which feels that it needs to cut costs to remain
competitive vis-a-vis its Southeast Asian neighbors.
ADB's Rana points out that the record on
domestic demand growth in East Asia has been mixed.
Accommodative fiscal and monetary conditions and the
buoyant income from exports have contributed to improved
sentiment among both consumers and businesses in most
countries. Malaysia, Singapore and Thailand are showing
robust increases in domestic demand. The improvement has
been the sharpest in Singapore. "These three economies
are also the most export-dependent in the region, which
suggests that the improvements in domestic demand,
particularly in the first two countries, were partly due
to the buoyancy of export income in recent quarters. In
Thailand, off-budget stimulus and government policies to
promote the property and rural sectors since 2002 have
contributed to the strength of domestic demand," Rana
said.
Still, the demand growth was the highest
in the PRC in the first quarter, primarily reflecting a
sharp rise in fixed investment. More recently, PRC
authorities' attempts to restrain fixed investment to
more sustainable levels seem to be having some impact.
Other indicators on credit and money supply are
moderating as well, said Rana.
Jayanthi
Iyengar is a senior business journalist from India
who writes on a range of subjects for several
publications in Asia, Britain and the United States. She
may be contacted atjayanthiiyengar1@hotmail.com.
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