China economy unlikely to lose steam yet

  • Letters
  • Sunday, 18 Jul 2004

By Jeffrey Francis

WHILE the Chinese government is trying to slow down its still-booming economy to avoid the painful bust of the late 1980s and mid-1990s, Australian economists believe that the drive of the economic engine will roll strongly for at least 10 years more. 

These views are based on their observations of the current situation and the analyses of monthly data, which gives the earliest indication of the Chinese economy. 

Although the latest available figures show a general slowdown in the economy, there is concern that some sectors in fact are accelerating, if not remaining status quo. 

Retail spending, for example, has risen significantly from 10% to 17% in the 12 months to May this year. This upsurge is partly due to retail price inflation. It also shows that the volume of consumer spending is growing rapidly. 

Export trade is being maintained at 40%, indicating that there is no evidence of any slowdown in this sector. 

Similarly, import demand is also being maintained at 40% during the same period. So while the companies are happy with increased profits, the consumers are hit with high prices. 

This double-edged effect is worrying consumers because it affects 40% of the household living expenditure. 

In turn, the Consumer Price Index (CPI) has gone above China’s desired rate of 3% to the current level of 4.4%. 

Much of this is due to the surge in food prices, which is running at almost 12% in the 12 months to May this year. 

Not surprisingly, the Chinese government is worried that the sharply increased prices of consumer goods will further push inflation higher. 

Already the Peoples’ Bank (which is equivalent to Malaysia’s Bank Negara) is facing a dilemma – the inflation rate is much higher than the bank’s deposit rates of only 1.98%. 

Understandably, savers are not happy receiving a negative interest rate in real terms on their savings. 

But, fortunately, the overheating in the Chinese economy is restricted to predominantly commodity prices, particularly in the industrial areas such as metal, steel, ores and grains. 

All this, of course, is contrary to the Chinese government policy to curb economic growth to 7% in order to provide sustainable growth, which could create nine million new urban jobs by the end of this year. 

Australian economists, however, believe that real economic growth will be at least 8% a year for the next 10 years. 

The difference in only 1% more than the government target might look negligible, but it can be quite significant for a country of the size of China, which is the second largest economy in the world. 

National Australia Bank senior economist Tom Taylor is justified to warn that the global economic growth is “hanging heavily” on what happens in China. 

Addressing businessmen at the Western Australian Chinese Chamber of Commerce networking function in Perth recently, he points out that China’s share of the global growth between 1995 and 2002 was 25% – which is 5% more than that of the United States and 11% more than the rest of Europe. 

A former adviser to the Australian Federal Treasury and Foreign Affairs and Trade Department, Dr Taylor believes that a strong cutback in China’s economic growth could severely affect the world’s economies in term of food prices. 

Therefore, he thinks that the Chinese government will avoid what he calls “a one knife cuts all” approach to slow down its national economy. 

Nevertheless, it is anxious to avoid the repetition of the CPI surging to almost 30% as in the late 1980s and mid-1990s, after which the recovery has been a prolonged and painful period of adjustment in the economy. 

To ensure that manufacturers and investors comply with the government policy, officials are being sent to the sites of new major projects to check whether they are necessary in terms of national interest at this stage. 

At the same time, the Peoples’ Bank has tightened up on lending to investment projects in various industry sectors. 

Other options are the possibility of moderating interest rate rise, which is priced into the government’s bonds, and introducing more currency and capital account reforms. 

The currency, which is undervalued, will still continue to be pegged at RMB8.30 to US$1. 

One of China’s massive tasks, therefore, is the creation of jobs that satisfy 160 million “surplus” workers, employ young new entrants to the workforce totalling 11 million each year and meet the challenges of the 100 million to 150 million rural people, who continue to come to the cities in search of a better life. 

Having returned from Beijing two days ago and seen the changes that are taking place, I think China will succeed in its aim to sustain its economic growth with the dynamism and determination its people have shown so far.  

  • Jeffrey Francis is editorial consultant, Australasia-Pacific Media (e-mail: ) 

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