China producing soft landing
By Lu Haoting (China Business Weekly)
Updated: 2004-10-09 15:23

The Chinese government's efforts to cool down sizzling investment in some sectors of the surging economy are likely to produce a soft landing, predict some overseas analysts.

If China catches a cold, they added, some Asian economies might get the sniffles.

"China's economy will grow a warm 8.9 per cent in 2004, and cool to 8.1 per cent in 2005," said Lois Dougan Tretiak, vice-president and director of Economist Corporate Network (ECN) in China.

ECN is a division of The Economist Group.

"We expect the cooling measures to take effect, year by year, and slow the growth somewhat. But, obviously, it is not going to fall to a dangerous level. We will continue to see healthy growth in China."

Tretiak made the remarks recently as ECN presented its "Regional Strategic Forecast: The impact of China cooling."

ECN's forecast is similar to the Asian Development Bank (ADB)'s "Asian Development Outlook 2004 Update," which was issued September 22.

"China will achieve a soft landing ... with economic growth slowing from 8.8 per cent for 2004 to a more sustainable 8 per cent in 2005," ADB predicted in its report.

"Clearly, some of the monetary policies and administrative measures the government is taking to address concerns about excessive lending and excessive growth of the money supply, are successful," said Bruce Murray, ADB's resident representative in China.

China's M2, a major measurement of money supply and a key indicator of credit growth, grew 13.6 per cent, year-on-year, by the end of August. That compared with 15.3 per cent at the end of July, and 16.2 per cent at the end of June.

The rapid pace of investment growth has slowed from the very high levels experienced in the first quarter, which reflects the gradual impact of the policy-tightening measures, ADB said.

Fixed asset investments grew 26.3 per cent, year-on-year, in August. The growth rate was 31.3 per cent in July.

Gross domestic product (GDP) growth slowed to 9.7 per cent in the year's second quarter, from 9.8 per cent in the year's first quarter, and 9.9 per cent in the fourth quarter of last year. Growth for the year's first half was 9.7 per cent, indicate data from the National Bureau of Statistics.

ADB forecasted consumption in China will increase 13 per cent next year. That growth will be supported by higher urban and rural incomes.

Exports are forecast to rise 22 per cent this year and 16 per cent next year, on expectations the world economy will achieve higher growth this year compared with last year, and moderate growth next year.

ADB also expects China will remain the leading destination for global foreign direct investment.

Foreign investment will continue stimulating exports, as foreign-invested firms produce more than half of China's exports, the report said.

Imports are likely to outpace exports, ADB said. Its report predicted China's imports will increase 30 per cent this year and 20 per cent next year, due to the country's growing appetite for a wide range of imports and its lower tariff and import barriers resulting from its World Trade Organization membership.

China's current account will tumble from a surplus to a small deficit -- for the first time since 1993 -- of about 0.1 per cent of GDP this year, ADB predicted. It is expected to be 1.4 per cent of GDP next year.

"China is a major player in the global economy now. Over the last few years, it has also been one of the major contributors to global economic growth ... and has been acting as a regional growth engine," said Robin Bew, chief economist at Economist Intelligence Unit of The Economist Group in the United Kingdom.

"The way China affects the rest of the world is what happens in trade. Over the course of the slowdown, China's import demand will grow at a more modest pace, and that is going to affect other economies in the world.

"Maybe five years ago, China was ... a production base for other countries. The story is much broader now. China is an important buyer market for products. What happens in the region counts in what's going on in the global economy.

"If China did suffer from a sharper slowdown than we are currently expecting, the impact of that on global demand would be quite significant. If China slows substantially, world trade slows substantially. So do many other countries also depending on world trade."

Bew was echoed by the ADB forecast.

"ADB's economic model suggests a further cut in fixed asset investment and reduction in the GDP growth rate from 8 per cent to 6 per cent would have a moderate impact on Asian economies," Murray said.

South Korea, China's Taiwan Province and Singapore would experience losses -- about 0.4 percentage point -- in output. Japan's GDP growth would decline by 0.24 percentage point, ADB said.

Some analysts suggest China's growing appetite for all kinds of commodities, including oil, is putting pressure on international prices.

Bew said the drop in international prices of raw materials is likely due to "a decline in the growth rate of China's consumption of these commodities."

"But oil price declines will be more modest than the declines you see in other commodities. That has a lot to do with what's happening in terms of global oil supply. China has a very strong demand ... but it is not the only part of the story. You see very strong demand in other economies," Bew said.

"There hasn't been very much investment in oil production capacity, within the OPEC (Organization of Petroleum Exporting Countries) particularly, over the last few years, which means supply will remain quite tight," Bew added.

Murray agreed, and said China is "one of the contributing factors, not the only cause."

"I don't think China's demand has driven world oil prices to almost US$50 a barrel. There are lots of things happening," Murray said.

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