Economy gathers steam again: Bad
news By Jamil Anderlini
SHANGHAI - While the highest levels of China's
government gathered over the weekend to witness a
crucial leadership transfer, everybody - from the
country's economic mandarins to traders on Wall Street -
was asking the multibillion-dollar question: Is the
overheated economy on track for a soft landing, or could
the government's attempts to rein in rocketing growth be
propelling it straight into the ground?
The
high-drama struggle for control of the helm resulted in
Jiang Zemin eventually relinquishing his last official
post of commander-in-chief of the military on Sunday,
but for those interested in the government's economic
policies, the display was merely of entertainment value.
An ostensibly insignificant speech made by Premier Wen
Jiabao in the run-up to the Chinese Communist Party
plenum in Beijing was probably far more significant. The
crux of that speech centered on an apparent pledge to
maintain and extend the government's current austerity
measures and included hints that the first interest-rate
rise in nine years is in the cards.
Until a week
ago, most people thought cooling measures were working
pretty well. Investment in overheated industries,
especially new property projects, had fallen sharply, as
had attendant indicators such as steel demand and
imports - bad news for global steel producers but a good
sign that rampant, unsustainable investment in certain
sectors was being reined in.
There were even
those who voiced concern that the government's cooling
measures were proving too effective and would push the
economy into a hard landing. The loudest of these voices
were probably local government officials, disgruntled at
having pet prestige and infrastructure projects put on
hold at a time when pressure to provide jobs to the
growing army of unemployed urban workers is mounting.
But last week, when the government released
industrial-output figures for August that showed a
higher-than-expected growth rate, concern quickly
switched to whether the government's tightening has been
effective enough. Industrial output rose 15.9%
year-on-year in August, up from the 15.5% growth in
July, reversing a six-month slowdown and leading to
speculation that the government's cooling methods were
no longer working.
Meanwhile, gross domestic
product (GDP) growth was still an astounding 9.7% in the
first half and in late August, the International
Monetary Fund (IMF) raised its 2004 GDP growth
projection for China from 8.5% to 9% - well above the
government's stated goal of about 7%.
Fixed
investment grows too fast The figures for
fixed-asset investment growth were also released and
though they showed a drop from July, fixed investment
was still growing uncomfortably fast, at 26.3% in August
and 30.3% for the first eight months.
What these
numbers basically mean is that companies in China are
producing stuff and investing in construction, factory
equipment and other fixed assets faster than is
sustainable and though the government has been trying to
slow things down since late last year, the latest
evidence seems to show that things have started to pick
up again.
Almost everyone agrees that the
problem is not so much that the Chinese economy as a
whole is overheating (at least not yet) but rather that
there has been a rush of blind and unsustainable
investment into certain "hot" sectors of the economy.
First among these is property. As a drive through any
Chinese city immediately makes clear, the country is
undergoing a construction boom on a scale unprecedented
in history.
Gazing out over a growing skyline of
upscale apartment and office complexes in Shanghai or
Beijing, you can't help wondering where the developers
expect to find enough people who can afford to live in
them. The same goes for the industries that provide the
fuel for the construction boom. Steel mills, concrete
factories, aluminum smelters and car producers have
sprung up all across China's countryside. The problem is
not the sheer scale of investment, which is enormous,
but the redundant and speculative quality of those
investments - many of them will never find customers for
the low-volume, poor-quality products they hope to
produce - and the associated economic risks such as
inflation and the eventual non-payment of bank loans.
The danger for China lies in the potential for
the wider economy to catch the fever that is running
through these scorching industries. The consumer price
index inflation figure for August was 5.3%, the same as
in July (when it hit a seven-year high). This is not yet
a real cause for concern, according to Jonathan
Anderson, chief economist for Asia at UBS Securities in
Hong Kong, considering that most of the increase is due
to higher food and energy prices, which have a tendency
to be excessively volatile.
Although Anderson
says the risk is currently quite low, China has a
history of moderate inflation exploding into high
inflation within one or two quarters, and the "hard
landing" of the mid-1990s, when the country underwent a
period of sustained double-digit inflation, is uppermost
in many minds. After the last excessive boom and the
economic tightening introduced by then-premier Zhu
Rongji, Chinese growth decelerated sharply through the
second half of the 1990s - to a real rate as low as 3%
by UBS estimates.
Slow, but not so
slow While it barely registered on most
countries' radars in the mid-1990s, China's economy is
now the world's seventh-largest and far more integrated
than it was back then. The entire Asian region, and
indeed much of the globe, relies on China as the engine
responsible for up to a third of the global economic
growth in recent years, and a slowdown to 3-4% would
wreak widespread economic havoc.
And the
repercussions could be far worse within China. The
central government openly states that if annual GDP
growth were to fall too far below 6-7%, the social costs
and the ensuing instability would be more than the
current political system could bear. If the country were
to descend into widespread political turmoil, the
economy would be the least of anyone's concerns.
"We should reduce the speed but not have a
sudden slowing," are the wise words of Premier Wen
Jiabao. "The most important thing is that we have to
control the two valves: one is credit, the other is
land."
Going by the latest figures on
money-supply growth, the government is doing a
reasonable job in slowing down credit. The 13% growth in
money supply in August was down sharply from July's
15.3%, but Northwestern University political economist
Victor Shih says there is concern that money-supply
growth could pick up again in the next couple of
quarters. He says this is what happened in 1993 after
the first round of Zhu's austerity measures when, after
a few months of tough central bank policies, local
governments began to borrow at a torrential rate again,
causing the high inflation in 1994.
The collapse
of retrenchment at that time was brought about by former
paramount leader Deng Xiaoping's displeasure with Zhu's
policies. "Similarly, we hear stories today of elite
division over Wen's austerity measures, which might
trigger a fresh wave of lending and investment on the
east coast," Shih said.
China is walking, or
perhaps cycling, an economic tightrope. A soft landing
is urgently needed now to avoid a much harder one later,
but if cooling measures go too far they could bring
about the hard landing they are meant to forestall.
The government's initiatives have so far been
targeted primarily at suppressing the overheated
industries - such as property, steel, cement and
automobile manufacturing - while allowing others to
flourish. This has been done using a unique mixture of
economic levers and regulatory decrees, a sort of
"macroeconomics with Chinese characteristics".
On three occasions since August last year, the
central bank, the People's Bank of China, raised the
amount of money that commercial banks needed to hold in
reserve to slow credit growth. At the same time, the
government made it clear which industries it did not
want to receive easy credit. From the start of July, new
listings on the stock exchange have been restricted and
a high-profile bid by property developer Beijing Capital
Land to raise 3 billion yuan (US$360 million) by listing
on the Shanghai market was denied.
Beijing
check on adrenaline The central government's
Ministry of Land and Resources has applied closer
scrutiny this year to projects that previously required
approval from just local governments. State media
reports say the ministry has re-examined 70,600
fixed-asset projects across the country with a total
investment of 17.2 trillion yuan and of those, 4,150
projects worth 844 billion yuan had been canceled,
including steel and cement projects, office blocks, golf
courses and a large number of "economic development
zones".
As Shih points out, these cutbacks come
at a price. The banks that provided the loans for the
canceled projects will see little or none of their money
returned. Looking back again to the mid-1990s, there was
a similar period of development-zone fever after which
Zhu Rongji was obliged to close about 8,000 of them and
point out that there wasn't enough money in the hands of
all the overseas Chinese in Southeast Asia to develop
these zones. A huge proportion of the non-performing
loans (NPLs) that still weigh heavily on China's banking
system today were generated in that retrenchment. "I
suspect a new wave of NPLs is being produced by the
current austerity period," said Shih.
The
ability of the banking system to handle another huge
influx of bad loans is dubious, to say the least, but
that is more of a long-term concern. Right now the
problem is whether the government's macro-tinkering is
paying off. The evidence is that in the overheated
sectors things are starting to cool. Along with
significant slowdowns in the property and steel
industries, sales of vehicles increased just 9.8% from a
year earlier in August, compared with a frenetic growth
level of 49% for April.
In a survey of
economists conducted for Asia Times Online, the mood was
generally one of cautious optimism that China was in the
process of pulling off a soft landing despite the many
potential potholes along the runway. Austerity measures
were introduced comparatively much earlier than they
were in the mid-1990s, good growth in China's retail
sales and exports are providing a cushion for a slowdown
in capital spending and Beijing still has some options
left up its sleeve.
The central bank has been
saying for several months that it would probably raise
benchmark interest rates - something it hasn't done in
nine years - if headline inflation rose above 5%. We've
now had two months with inflation sitting above 5% and
there is a growing expectation that a rate rise is in
the pipeline. Officials have been strongly hinting at a
liberalization of interest rates, and UBS's Jonathan
Anderson is expecting a mild increase of about half a
percentage point in the next couple of months to combat
inflation and further slow investment spending by making
borrowing more expensive.
So while the
government prepares to tap the brakes, it's time for the
Chinese to fasten the seatbelts and prepare for what is
shaping up to be a rather bumpy landing.
Jamil Anderlini is the former editor
of China Economic Review. He can be reached atJamilanderlini@sinomedia.net.
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