Exports might be reaching the saturation point

Editor's Note: Citigroup forecast that China's GDP growth would reach 9.8 percent year-on-year next year and that inflation could reach 3.2 percent.

But such an inflation level would not pose enough of a problem to trigger a policy tightening measure from the government, according to Citigroup.

The possibility of a steep rise in inflation is very slim, Shen Minggao, Citigroup's Hong Kong-based chief economist for Greater China, said during a recent interview with China Business Weekly reporter Xin Zhiming.

The bank also projected that new lending, which could reach 10 trillion yuan this year, will not decrease drastically next year. Exports, meanwhile, will expand by a double-digit rate to make up for the gap left by slower investment growth, Citigroup projected.

But China's exports likely will not enjoy significant growth in 2011 and in following years, Citigroup projected.

If the dollar continues to depreciate, the yuan will face more pressure to appreciate in the first half of next year, he said.

Q: The Reserve Bank of Australia has decided to raise the cash rate by 25 basis points, the first such announcement since the world economy began to recover. Do you think China might also enter a policy-tightening cycle as prices gradually pick up?

A: The move by the Australian central bank serves as an alarm for other countries. We should not act when an inflationary trend has become entrenched. Policy should be pre-emptive.

But in the short term, we likely will not see a new tightening cycle. It needs some preconditions if it's put in place. One is that inflation rises dramatically and unexpectedly. Second is that the economy becomes overheated, which pushes up prices. The third precondition is that China's exports resume a growth rate of more than 20 percent next year.

Those factors might make it necessary for China to change its fairly relaxed policy, but the possibility of a major policy change next year is slim.

Q: The world economy is recovering, but do you think the recovery will be sustainable?

A: Given the current situation, the global economy is stabilizing and there are increasing signs of a solid recovery. China's economic recovery will lead the world, and we think the United States will continue its current growth momentum next year.

However, the old growth model of the US economy has not fundamentally changed, which makes people worried about the sustainability of the recovery. The global economy has yet to go through a real structural adjustment.

Q: How about China's economic adjustment?

A: The Chinese economy has undergone some adjustments, and the country's domestic demand has grown the fastest in Asia. Retail sales this year and even next year will contribute more to GDP growth.

By contrast, other Asian economies such as South Korea have had slower structural adjustments compared to China. Their recovery is more a result of export growth than domestic consumption growth.

Meanwhile, even China's structural adjustment could be short-term and unsustainable. On the whole, we've seen some signs of the structural adjustment, but structural adjustment is not the core factor of the recovery.

Bank loan-backed investments have been the major driving force of China's growth this year. This year's new lending could reach 10 trillion yuan. But next year, it's set to decrease. People are not sure how much the decrease will be.

Q: Do you think there will be a dramatic decrease next year in new bank lending?

A: We think there will not be a big decline in new bank lending. Local governments have been deeply involved in this round of investments.

Their investment projects have increased demand for lending. Those projects are often long-term and heavily dependent on bank loans.

If the economy slows down significantly, the local governments would suffer from declining revenues and would be facing more pressure if bank lending were tightened.

The proportion of long-term loans to overall lending is about 53 percent. It was about 25 percent in the 1990s.

Since enterprises borrowed from the banks, the banks are in a dilemma concerning whether to re-finance them. If they don't, those enterprises might suffer from a loss of liquidity and become unable to repay their loans. So banks must re-finance them. Therefore, new bank lending will not decrease dramatically next year.

What we are more worried about is the year after next year. As the world economy continues to recover, China's exports could achieve double-digit growth. But it's hard to sustain.

A key reason is the proportion of imports to the United States, Europe and Japan from China . Now that the United States, Europe and Japan account for about 45 percent of China's exports, there's not much room left for China's exports.

So by 2011, since investment growth might slow, China's export growth might also slow, which would affect overall economic growth.

Q: Why does protectionism seem to be on the rise?

A: Trade protectionism, we all know, is a tradeoff between long-term and short-term interests. In the long term, protectionism certainly is undesirable. In the short term, however, protectionism is used to cater to domestic interests.

Looking back, since China joined the World Trade Organization in 2001, Chinese exports have grown by about 30 percent on average each year. But we did not encounter much protectionism until the eruption of the global financial crisis.

Now China's exports have decreased by 15 percent, but the country suffers from more protectionist measures. It is not that we have exported more, but that the importing countries are suffering from rising unemployment rates

Protectionism has much to do with domestic interests, especially unemployment. In the short term, therefore, protectionism will continue to rise.

Q: The value of the Chinese yuan against the dollar has not changed much during the past year. As the global economy recovers, do you think the pressure for its revaluation will increase?

A: The pressure will gradually increase as China's foreign exchange reserves continue to expand and exports resume positive growth.

My opinion is that in the first half of next year, the second quarter at the latest, the yuan could be appreciated by a small margin. The pace would not be too fast.

The yuan has roughly been pegged to the dollar, although it's officially pegged to a basket of currencies. The dollar has depreciated by 12 percent to 14 percent, and therefore the yuan has been depreciating against major currencies. If the dollar continues to depreciate, the yuan would face more pressure for its fast appreciation.

(China Daily 11/02/2009 page2)