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Oil prices cast shadow over growth prospects
(China Daily)
Updated: 2005-08-18 05:52

The latest statistics on economic activity in July apparently defy previous concerns that deflation may soon return.

Impressive trade and investment growth figures and a comfortably low consumer price index (CPI) indicate the economy has fared quite well so far this year.

But if the economy is to remain healthy, policy-makers must pay greater attention to rising oil prices - a strain that has yet to be fully recognized.

The 9.5-per-cent growth in gross domestic product (GDP) in the first half of this year was not enough to convince foretellers of deflation. With their gaze set on slowing year-on-year investment growth and a decline in the CPI in the second quarter, some domestic economists warned of a return to deflation, not in the rest of this year, but in the next two years.

Given the increasing oversupply of most products in the domestic market and drastic measures the government took to counter property "bubbles" early this year, such an argument is justified. Overcapacity in most industries and inadequate investment and consumption in the property sector could easily throw the country back into a period of deflation.

But the economy appears not to have slipped back, as second quarter statistics suggest.

In July, trade volume reached US$120 billion, with a trade surplus of US$10.4 billion, the second largest total the country has ever registered in a single month. Urban fixed-asset investment rose by 27.7 per cent year-on-year and the CPI climbed from 1.6 per cent in June to 1.8 per cent last month, putting the brakes on the downward spiral of the leading inflation measurement.

Besides these signs of growth momentum, the central authorities' recent notice of banks' falling loans and the emerging impact of the credit squeeze on the property sector a key growth engine for the national economy are all precautionary tales warning of possible economic slowdown.

The economy is likely to keep pressing ahead at its current brisk pace that has been maintained for the past 25 years, in the absence of the disturbing oil factor.

As prices at domestic petrol pumps are still essentially fixed by the authorities, the real sting of soaring oil costs has not been fully felt nor thus properly reflected in the growth outlook.

But the spreading shortage of oil at some economic powerhouses across the country shows the existing pricing mechanism has failed to meet the demands of the market.

A spike in domestic oil is inevitable as international prices keep hitting new records, and show no sign of dropping back in the near future. Domestic oil prices must be allowed to rise to restore a balance between supply and demand.

Higher petrol prices will hit hard, even though drivers are a relatively affluent group. Price rises will put a considerable dent in the country's efforts to boost domestic consumption.

Expensive energy will further shrink domestic enterprises' profit margins, and therefore discourage investment.

Policy-makers will not be happy to be forced to face such a situation. The pump price authorities have tried hard to control is lower than what refiners need to cover production costs and what car drivers will pay to fill their empty tanks.

As economic expansion increasingly tests the country's energy and resource limits, policy-makers should come up with measures that allow the economy to absorb rising energy costs.

Delaying admitting the real situation and failing to take decisive action now will give runaway oil prices free rein to hurt the economy later.

(China Daily 08/18/2005 page4)

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