ECONOMISTS SAY CHINA AIMS FOR SOFT LANDING


2004-05-05
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China�s high-flying economy appears to be heading toward a slowdown, as economists debate whether a hard landing will come and how serious it will be, RFA reports.

Pressure on the economy has been mounting over the last year despite a series of warnings from the cabinet-level State Development and Reform Commission (SDRC). Economic growth and investment rates have far exceeded government forecasts and guidelines this year.

�I think a cooling is possible,� Harvard economics professor and China specialist Dwight Perkins said. �Actually, what they want now is a cooling. Their 9.7 percent growth rate in the first quarter, that�s probably not a sustainable growth rate in China these days.�

Officials became concerned when the country�s gross domestic product rose at a 9.1-percent rate last year in spite of severe energy shortages in major cities. On April 26, President Hu Jintao held a meeting with the Communist Party�s top policy-making body, the Politburo, to discuss the problems of excessive investment and power shortages

The meeting called for �active measures� and �strict control� of new construction, the official Xinhua news agency reported, putting political muscle behind the SDRC. On the same day, the official People�s Daily newspaper published remarks by People�s Bank of China vice-president Wu Xiaoling, who warned that the central bank would have to take �harder measures� if lenders and local governments failed to show restraint.

A directive issued by the China Banking Regulatory Commission ordering commercial banks not to rush loan approvals before the May holidays caused widespread alarm at a potential credit squeeze, hitting financial markets across Asia.

A decline in China�s GDP growth rate to 7 percent this year would be consistent with the goal that Premier Wen Jiabao set for the government when he addressed the National People�s Congress in March 2004. Perkins said that growth could slow even more if credit is severely squeezed.

�One�s talking about slowing the investment and slowing the growth rate, and if they make some mistakes in doing it, which is easy to do, I can conceive of them going to 5-6 percent,� Perkins said. �But it will take a lot more than just these problems to get them below 5 or 6 percent.�

Fears of a sudden crackdown on lending and investment also rose because of the government�s decision to halt construction of a steel mill at Changzhou, near Shanghai. Executives of the Jiangsu Tieben Iron Company have been charged with illegally obtaining land and loans for an investment valued at 10.6 billion yuan (U.S. $1.2 billion), according to Xinhua�s online news service.

Gregory Chow, an economics professor at Princeton University, blames China�s troubles on its huge buildup of foreign currency reserves, which have created excess money supply. China�s reserves have already reached $440 billion, thanks in part to the government�s strategy of keeping the value of the currency low to maximize exports.

�I think that a major reason for the problem was the rapid increase in the supply of money, starting a year-and-a-half or two years ago. And that increase in money was the result of China�s failure to appreciate its currency, so that there was a continued large export surplus,� Chow told RFA.

�The Chinese were earning a lot of foreign exchange. They could use the foreign exchange to exchange for the local currency, the renminbi . So it�s very hard for the central bank to stop the increase in money supply.�

China�s banks have been driven to extend new loans because of their huge volumes of deposits. At the end of March, the total assets of banking institutions in China rose by 17.3 percent from a year earlier to 28.8 trillion yuan, or nearly U.S.$3.5 trillion. But Chow said the economy as a whole was likely to stay relatively strong.

�I think that in terms of order of magnitude, if you look at total output in China, my own guess is that total output would still be growing substantially, easily over 6 percent.�

Gary Hufbauer, senior fellow at the Institute for International Economics in Washington, agreed. �People might say, well, it�s going to go into negative growth for several years or down to flat growth for several years. I don�t think that will be the outcome.� #####

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