Japan
economists split over China cool-down
By Kosuke Takahashi
TOKYO - As China tries to steer a careful path between rational growth and
much-needed deceleration of its super-hot economy, the Japanese business and
financial community is divided about the success and prospects for China's
efforts. That China succeeds is crucial for Japan, since the Middle Kingdom's
voracious appetite for imports has largely fueled Japan's economic recovery.
What Japan wants is a healthy, not a super-hot, Chinese economy.
China's latest figures, released on Tuesday, showed that industrial output,
while still enormous, slowed somewhat in July for the fifth consecutive month.
Production increased by 15.5% in July, compared with 16.2% in the year to June,
according to the State Statistical Bureau. The forecast had been 15.9%,
significantly below the highest growth of 23.2% in the 12 months to February.
Some Japanese economists still expressed concern for the high growth and
skepticism about the reliability of China's statistics.
In the spring, China was so alarmed at a national economic growth rate of 9.7%
that it applied the brakes, ordering reduced investments in some key industrial
sectors, such as steel and cement, as well as real estate. It also ordered
curbs on reckless lending. As early as mid-2003, however, it had been trying to
moderate growth, to no avail.
Until very recently, Japan had been very concerned that China's economic
cool-down, major or modest, might send a chill across corporate Japan,
especially through its export industries sending goods to China. Now, despite
the new numbers, the concern persists and some economists and business people
fear that China may be unable to achieve its designed slowdown. The year-end
statistics will be the test, they say.
"China's measures for curbing business overheating are mainly focusing on such
things as the tightening of lending restrictions and the suspension of capital
investment proposals at the micro-level, not at the macro-level," said Yasunari
Ueno, chief market economist at Mizuho Securities Co. "Therefore, combined with
its excess supply capacity, I doubt if China can surely achieve the soft
landing of the economy," he said in an interview with Asia Times Online.
Despite the latest data, he said economic growth is still disturbingly high,
but he said China cannot apply the brakes too hard - that would lead to a hard
landing.
Naoto Saito, economist at Daiwa Securities SMBC Co's Beijing office, holds
similar views. He told Asia Times Online that China is just curbing investments
in individual businesses and sectors and not controlling the heating-up of the
economy as a whole. "The possible future introduction of special tax
preferences towards foreign companies itself will be the key to the fate of
Japanese companies in China," Saito said, referring to corporate income tax
cuts for foreign companies.
Japan, China economically co-dependent
Despite their political differences, economically China and Japan have already
become inseparable, co-dependent partners. Some Japanese experts even say,
"When China sneezes, Japan catches cold," referring to Tokyo's heavy economic
dependence on Beijing. It is also said that when China sneezes, Asia catches
cold.
Indeed, China is Japan's second-largest trading partner after the United
States, while Japan is China's largest trading partner. Experts expect that
China will become Japan's largest trading partner in a few years. China already
has surpassed the US as the largest exporter to Japan. As if to reflect this
growing interdependence of the two economies, Japan's exports to and imports
from China, even excluding Hong Kong, both hit record highs in the first half
of 2004, the latest data by Japan's Ministry of Finance (MOF) showed. Exports
to China, excluding Hong Kong, climbed 24.2% to 3.8 trillion yen (US$26.9
billion). Imports from the country, excluding Hong Kong, were also up 14.9% to
4.74 trillion yen.
Even before the drastic macro-control measures this spring, China had switched
its economic policy stance from pro-growth to pro-restraint in investments
around mid-2003. Behind this move was its rapid economic growth. In 2003, its
gross domestic product (GDP) grew 9.1%, the highest since 1996 and more than
predicted by the Chinese government and analysts. This high growth was driven
by investments in fixed assets, which rose 28.4% from a year earlier.
Surprisingly, it accounted for more than 40% of the GDP in nominal terms.
Against this backdrop of the overheating economy, China has taken steps to cool
down its economy. For example, in June 2003, the Chinese government tightened
lending restrictions on real estate and the construction of factories. The
People's Bank of China also made monetary adjustments in September to tighten
the money supply by increasing banks' cash-reserve requirement from 6% to 7%.
Last month the Chinese economy yielded yet another interesting and
controversial figure. The government reported that China's GDP in the
April-June quarter grew by 9.6% over the same quarter of last year. This was a
lower-than-expected number and many believe it to be a sign of a soft landing.
But that would still be a huge increase, with the growth pace holding level
from the 9.8% of the January-March term. For this reason, not a few experts
again raised questions about China's handling of its still sizzling economy,
while acknowledging that cooling efforts will take some time to take effect.
"That was a sign of cooling in China's overheated economy," said Kimiyoshi
Tsukazaki, economist at The Japan Center for International Finance. "But it's
still not enough."
China's control mechanisms limited
Tsukazaki, who describes himself as an optimist, believes China can finally
achieve a soft landing of its economy. He told Asia Times Online that China's
measures have had limited but steady moderating effects on its economy,
especially on the restrictions on investments in the construction business and
steel industry. In his view, the Chinese government can only implement limited
control over its overheating economy, and to a limited extent, due to its
imperfect capital market mechanisms.
When it comes to the effects on Japan of China's cool-down, Japanese economists
again are divided. Some say Japan's economy, in the doldrums for years, already
has recovered sufficiently, so that China's further cooling down would have
little negative effect in pushing down Japan's economy in both the short and
long term. Others say just the opposite, stressing that the recovery of Japan's
economy still heavy relies on China's economic boom.
Kazuo Mizuno, chief economist at Mitsubishi Securities Co, views the Chinese
cool-down economic policy negatively in the short and long term - but
positively in the mid-term. In the short term, Mizuno told Asia Times Online,
China's cool-down in construction and real estate puts Japan's export
businesses such as the steel and cement industries under pressure. In the
mid-term, however, Japan's economy can get a boost especially from a Chinese
construction rush, helped by big events such as the 2008 Beijing Summer
Olympics and the 2010 Shanghai World Exposition. But in the long run, Mizuno
said, Japan will face competition from China as a supplier itself.
Around that time, he said, China might tackle the issue of its huge
non-performing loans, leaving Tokyo with possible bad debts. Tokyo already has
been increasing foreign direct investment in China's public and private
sectors, and experts are afraid those loans and investment would be not
collected if China's bubble economy burst.
Japanese economists also differ with one another about whether China keeps a
sufficiently tight rein on its massive domestic market; though it has 1.3
billion people, the vast majority are poor and not yet consumers. Experts in
Japan express concern that China's income gaps have been widening rapidly,
especially between rural and urban areas; not reducing the inequities could
lead to social unrest, they say. Few disagree that bringing about greater
balance and equality would be a gargantuan economic and social undertaking of
historic proportions.
Japanese business people say the crucial test of whether China really can cool
down its economy will be the statistics at the end of this year. Tokyo will be
carefully observing China's steps, including possible lending-rate hikes and
tighter lending standards for China's four major state-owned commercial banks.
Kosuke Takahashi is a former staff writer at the Asahi Shimbun and is
currently a freelance correspondent based in Tokyo. He can be contacted at[email protected].
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