Prudence navigates economy
By Zhu Qiwen (China Daily)
Updated: 2004-07-22 14:58

Slightly slower economic growth in the second quarter has barely eased fears that China's current boom may go bust if reckless investment fever is not effectively checked.

However, even an impressive half-year performance report can hardly diminish the challenges confronting domestic policy-makers, given the increasingly complex prospects of the Chinese economy.

Latest figures from the National Bureau of Statistics (NBS) indicate the country's gross domestic product (GDP) grew 9.6 per cent during the April-June period over the same period last year. It rose 9.8 per cent year-on-year in the first quarter.

For China, one of the world's fastest growing economies, such a growth rate is neither too high nor too low. As many observed, it falls right in line with the country's long-term growth potential.

The Chinese economy recorded average annual growth of 9.8 per cent between 1979 and 1997. Though the East Asian financial crisis reduced that rate to about 7 per cent in the late 1990s, it was merely a blip, not a break in the trend.

Yet, as the economy has picked up its growth momentum over the past two years, cautions have also arisen about how long it can last.

Early calculations suggested a double-digit GDP growth during the April-June period this year. But the NBS revised the underestimated growth in the second quarter of last year when the country was hit hard by the outbreak of SARS (severe acute respiratory syndrome).

As a result China experienced a dip in growth in the second quarter compared to the first.

That is widely acclaimed as evidence that the central government's tough measures to cool the economy are having an impact.

Breakneck investment growth, the main culprit, has been considerably reined in. Statistics show that year-on-year growth of fixed asset investment in urban areas was lowered to 31 per cent for the first half - 16.8 percentage points lower than the growth rate of the first quarter.

That is in marked contrast to the stunning 53 per cent growth in fixed investment in the first two months this year.

Nobody believed fixed investment would continue growing at that rate. Explosive growth is simply not sustainable.

Now the latest half-year figures clearly demonstrate how hard the central government slammed on the brakes in the second quarter.

While denying an overall overheating of the economy, the monetary authorities focused their credit squeeze on several sizzling sectors like steel and real estate.

By cutting back growth in those sectors, the authorities alleviated mounting pressure on energy supply while at the same time forestalling inflation.

The surging demand for electricity caused widespread blackouts across the country last year. Unchecked fixed investment could worsen the problem this year.

Prices of raw materials are spiraling and filtering through into consumer prices. Under such circumstances the inflation-sensitive monetary authorities cannot afford to sit back and watch.

However, a burning question is if the benefits and cost of such a credit squeeze have been thoroughly weighed.

The Chinese Government has made clear its goal to avoid a "hard landing" while cooling down the economy.

But on which engine will the country's moderate economic growth be based? Export, consumption or investment?

Though China's trade volume almost doubled over the past three years, the diminishing trade surplus implies the country can no longer pin too much hope on this engine as its major source of GDP growth. In fact, the country registered a trade deficit of US$6.8 billion in the first half of the year.

Consumption has long been viewed as the most promising growth engine. In the first half of the year China's total volume of social consumption reached 2.52 trillion yuan (US$304 billion), an increase of 12.8 per cent over the same period last year. But it is blindingly obvious this engine still pales before robust investment.

Chinese residents' income growth is the key.

In the first half of this year urban residents' disposable income reached an average of 4,815 yuan (US$600), up 11.9 per cent. More encouraging is that the average cash income of farmers reached 1,345 yuan (US$160), up 16.1 per cent, the largest increase since 1997.

In the meantime the consumer price index, a key inflation gauge, rose 3.6 per cent. And particularly worrying is that it rose 5 per cent in June.

Though the central bank insists such an inflation level is still not enough to drive them to hike interest rates, consumers will have to think twice before opening their wallets.

Moreover, without substantial improvement in consumption policies and expectation, Chinese consumers are shrinking back from the consumption trend of recent years.

For instance, sedan sales dropped from 221,000 to 167,300 between April and June, according to the China Association of Automotive Manufacturers.

The sales drop is only a foretaste of a broader problem for carmakers who are still vying with each other to increase their production capacity.

The country has to accept the fact that its economy will remain investment-driven in the foreseeable future.

A number of domestic enterprises have already bitten the bullet of monetary authorities' credit control in the first half of this year.

Complaints are getting loud that the tight credit policy is costing businesses too much, and policy-makers need to respond to those concerns.

Investment growth is still integral to the country's economic growth. To address the structural problem of investment, smarter credit policy is the best answer.

Close