Asia Times: A new kind of crisis


	November 9, 2001	atimes.com

China

A new kind of crisis

BEIJING - As economic slowdown has occurred simultaneously in the world's three major economies - the United States, Europe and Japan - with many other economies affected, there is reason to believe that the international economic environment next year will be worse than that caused by the Asian financial crisis of 1997-98. The economic plight of the Western world has also brought about some new trends in China's foreign trade and inflow of foreign capital, which will further develop next year.

Exports will continue to slow. China's exports dropped during the Asian financial crisis because, first, neighboring countries' currencies depreciated, and second, market demand in Asia shrank. But the US and European economies showed strong growth, especially the United States, where demand was strong.

Under great pressure not to devalue its currency, China had to raise its competitiveness in the West. At that time, there was still space to adjust export rebates, and the Chinese government was able to ease the impact of the Asian financial crisis by increasing its exports to Europe and the United States.

But the current situation offers no such opportunities for adjustment. The impact of the simultaneous drop in the demand of the three major economies is obviously bigger than the impact of the Asian financial crisis.

The impact of the slowdown in the United States is especially great. For every 1 percentage point rise in the US economy, there is a corresponding US$100 billion rise in imports. Therefore, a heavy downturn in the US economy will inevitably reduce import demand. China's dependency on the US market, including transit trade from Hong Kong, plus the import reduction in Japan and Europe and other indirect factors, is about 40 percent.

China's imports through general trade will continue to increase. Due to excessive investment in the world over the past few years, the production capacity of traditional industries is in serious surplus. Such a situation has even occurred in some high- and new-technology industries. There are obvious disparities in the growth space between China and other world economic powers.

China is slated to join the World Trade Organization next year and China's market will inevitably become a major target for foreign commodities, leading to dumping and anti-dumping frictions.

Since the beginning of last year, China's imports have been more than its exports as imports grew 12 percent in the first eight months. The high growth of imports is not the result of the import of supplied materials for processing trade but as a result of net imports through general trade. In fact, imports through general trade were as high as 21.4 percent in the first eight months. Imports through general trade was 14.3 percentage points higher than export through general trade. This trend will remain unchanged next year.

Foreign capital inflow will continue to increase. China's demand incentive package produced after the Asian financial crisis enabled its economy to grow steadily, becoming more and more attractive to foreign investment.

Direct foreign investment at present is quite different from that during the Asian financial crisis. The 2001 World Investment Report issued by UN Trade Development Council shows that due to the downslide of the world economy and the reduction of acquisition cases in the world, global direct investment will drop this year, the first time in a decade.

In fact, the drop is expected to be the biggest in the past 30 years. It is estimated that the flow of multinational capital into developing economies will drop from last year's $240 billion to $225 billion. The investment flowing into Asian-Pacific economies will drop from $144 billion to $125 billion.

The foreign capital used by China in the first eight months of this year grew 20.39 percent to $27.439 billion. Many multinational companies have cut employment in Europe and the United States but increased investment in China.

China approved 16,344 foreign-funded projects in the January-August period, growing by 18.55 percent year-on-year, with contracted foreign capital reaching $43.7 billion, a 31.56 percent rise year-on-year. China's fixed assets investment was obviously higher than last year and an important factor is the growth of direct foreign investment.

The proportion of direct foreign investment in the capital investment in the January-August period grew 78 percent year-on-year and that in renovation and technical transformation grew by 45.4 percent year-on-year. After the September 11 terrorist attacks in the United States, China was seen as having a high security coefficient and therefore became a priority choice for investment. So direct foreign investment and the size of H-share and B-share financing by Chinese enterprises are likely to increase rapidly.

All these factors will inevitably have many impacts. The export slowdown will lead to slow growth of total foreign trade, thus weakening the pulling effect of foreign trade on the economy as a whole. Imports through general trade will continue to increase, leading to a reduction in China's favorable balance of trade. An increase in the influx of foreign capital will stimulate the economy. These are all seen as aspects of the trend in China's economic development next year.

(Asia Pulse/XIC)