Monitoring 'overheating' economy
By Xin Zhiming (China Daily)
Updated: 2004-04-22 09:04

The official release of China's economic figures for the first quarter of 2004 has rekindled the fears of "overheating" originally sparked by an abrupt economic warming late last year.

The gross domestic product (GDP) growth was a higher-than-expected 9.7 per cent, while the fixed asset investment reached 879.9 billion yuan (US$106 billion) - up 43 per cent year on year.

While the GDP far eclipses the government's target of about 7 per cent annual growth, which is thought to be conducive to a sustainable development, the fixed asset investment, although remaining at a breathtaking pace, slid a little from the overall 53 per cent during the first two months.

Meanwhile, the consumer price index (CPI), the main indicator of inflationary pressure, was up 2.8 per cent year on year, 2.3 percentage points faster than in the same period of last year. That is somewhat arresting against a backdrop of prolonged deflation, but is still far from the benchmark worry level of 5 per cent.

Economists are divided on whether the economy is "overheated" in recent months - a situation that demonstrates the trickiness of the economic scenario.

The release of the first quarter figures has only intensified the debate.

At first glance, the economy continues on the track of heating up. Investment continues to soar; CPI remains at a relatively high level; and the GDP registered for the third consecutive quarter at above 9 per cent.

Many economists have thus expressed concern about the health of the economy despite the favourable diagnosis of the National Bureau of Statistics (NBS).

NBS spokesman Zheng Jingping said: "China's overall economic growth in the first quarter is fairly good with no big ups and downs."

The division comes from different perspectives of the economy.

Apart from the driving force of new investment, such as that in the power industry, the high GDP growth rate is the continuation of the economic boom that started late last year. It is uncertain whether the strong momentum can be maintained through the remainder of this year.

In the fourth quarter of 2003 GDP growth was a sizzling 9.9 per cent. The fixed asset investment last year was 26.7 per cent. And growth of the consumer price index (CPI) started to accelerate in the second half of last year, from below 1 per cent to 3.2 per cent in December - the highest since April 1997.

The "inertia" of that high growth maintained momentum in the first quarter.

The current rise is caused mainly from increased prices on fuel and raw materials. Given the usual time lag that prevents the price rise of upstream products from immediately filtering through prices of the downstream products, the CPI may be pressured to continue to rise in the short term. But it may not incur serious inflation.

Statistics show that 77 per cent of the 600 main industrial products suffer from oversupply while most of the rest witness a supply-demand balance.

In this condition, the price movement of production materials and grain will not bring along parallel hikes in the prices of other products.

As an example, grain prices grew by 17.5 per cent in February while vegetable prices declined by 10.4 per cent.

Some economists have warned that an economic crash could be the end result of continued overheating. But as long as the overall price level remains stable there is no imminent danger of substantial inflation.

Despite this, some corners of the economy are suffering from overheating, and the authorities should not sit idle.

In the first quarter, investment in real estate projects, an area of particular concern among policy-makers, was up by a staggering 41.1 per cent, according to the NBS.

Investment in the steel industry increased 150 per cent; and machinery investment grew by 74 per cent.

In 2003, China's steel production was a stunning 236 million tons, more than double that of the United States and Japan.

On the other hand, the technological level of the industries has not seen much improvement in the new investment cycle. This will lead to overproduction if the investment boom goes unchecked.

More seriously, much of the investment was encouraged by local governments, which are ardent for constructing rash and copy-cat projects to enhance their political standing.

In the first two months, spending by local governments on factories, roads and other infrastructure surged by 65 per cent - more than five times the 12 per cent increase by the central government.

Bank loans are behind much of the investment. More than two-thirds of the investment in property construction, steel, non-ferrous metal and building materials, for example, comes from the banks.

It means financial risks would menace the economic health if those industries experience ups and downs.

On April 11 the central bank announced it was raising the minimum amount of deposits required to be held as reserves from 7 per cent to 7.5 per cent.

The move followed the bank's March 24 policy adjustment of raising some interest rates for loans to commercial banks and lifting the reserve ratio for banks with lower-than-average capital adequacy ratios.

This shows the central authorities have become conscious of the frenzied credit-fueled investment.

By the end of March, however, the broad money supply, which includes cash in circulation and all deposits, grew 19.2 per cent, which was well ahead of a government target of about 17 per cent.

The rapid money supply growth makes people doubt whether the latest tightening measure will work.

Policy-makers are facing a real test.