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Days of sizzling economy over in China?
By Chen Yao (China Business Weekly)
Updated: 2004-05-07 11:46

China's sizzling economy will slow down this year due to the central bank's credit tightening and policy-makers' efforts to create a soft landing, suggests the Asian Development Bank (ADB).

The ADB released its annual economic forecast last Wednesday. The document indicated the world's sixth-largest economy will continue to grow rapidly this year, but at a slower, 8.3-per-cent pace.

The economy will grow 8.2 per cent in 2005, the bank forecasted.

China's growth this year will account for 15 per cent of the expected expansion in the world economy, even though the country has about 4 per cent of the global gross domestic product (GDP), the ADB said.

China's GDP last year grew a stellar 9.1 per cent, and 9.7 per cent in this year's first quarter. The Chinese Government has set its growth target at 7 per cent for this year.

Consumption growth will accelerate slightly, to around 9 per cent, in 2004-2005. It will be underpinned by rapid national urbanization and improving consumer confidence, ADB said.

Investment growth will likely fall by nearly half, to around 16 per cent, in 2004-2005, as the government tightens credit in several sectors - including property, steel and iron, aluminium and automobiles, ADB forecasted.

High housing prices, resulting from a lending crunch, will cool off property investment, ADB said, and foreign direct investment (FDI) inflows will grow moderately.

The Chinese Government will gradually phase out its expansionary fiscal policy and slow investment in government-sponsored projects, the bank said.

"FDI will enhance the productivity of immobile factors of production," said Zhuang Jian, an ADB economist.

"The benefits are especially important in connecting China's economy to the global economy, and in the area of technology transfer."

Two factors determine if a country will attract FDI: The commercial profitability of targetted investment projects, and a politically stable environment, Zhuang said.

In China's case, as profit margins in some overheating sectors are declining, and the Chinese economy is slowing down, the average returns on FDIs will dwindle, he said.

The Chinese Government, to attract more FDI, must make investment rules and regulations more transparent, Zhuang said.

"The government should also clearly identify the agencies that are responsible for issuing licenses, permits and approvals."

Investment was the main driving force behind China's soaring GDP growth last year, ADB said.

Investment contributed 6.3 percentage points to growth. In comparison, consumption contributed 3.9 percentage points and net exports subtracted 1.1 percentage points from the total figure, ADB said.

Fixed-asset investment soared 26.7 per cent last year, while public sector investment surged 28.2 per cent, indicate ADB figures.

Signs of economic overheating include the high rate of investment growth, rising prices of raw materials and shortages in some sectors, ADB said.

Power consumption increased rapidly last year, and 21 of 31 provinces suffered blackouts.

The rise in the consumer price index (CPI) will likely accelerate moderately, to 2.7-3 per cent, in 2004-2005, ADB predicted.

The current grain price increase will remain in place until later this year, and the price of energy and raw materials will rise, ADB said.

The People's Bank of China (PBOC), the nation's central bank, might raise the benchmark interest rate if inflation continues to soar, said Bruce Murray, ADB's resident representative.

China experienced serious inflation a decade ago, but the inflation ended when the Asian Financial Crisis began in 1997, he said.

The inflation in 1993-1994 was rated around 25 per cent.

China's local governments are partly responsible for the country's ongoing investment fever, Murray said.

While the central government must shoulder the blame if the economy turns sour, local governments only care about job creation and regional GDP growth, he said.

As a result, a higher interest rate might not necessarily dampen local governments' investment enthusiasm, he said.

The Chinese Government might also be considering using administrative power to help eliminate excess investment, ADB economists said.

The government should better co-ordinate fiscal policy with monetary policy to achieve the goal, they said.

A soft landing of the red-hot economy is badly needed, they added.

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