Post by Sunaru on Nov 14, 2003 8:17:04 GMT 7
13 Nov 2003
Economy shows signs of cooling
The Ministry of Commerce revealed on 12 November that actual foreign investment totalled $3.36bn in October compared with $5.16bn in 2002.
The figures suggest that fears about rapidly accelerating growth may have been overstated. The State Development and Reform Commission in late October had urged the government to take action to control overheating sectors of the economy. The concerns reflect the importance for social and political stability of maintaining strong, but balanced and sustainable economic growth. A boom comprising rapid credit growth, overinvestment and sector asset price bubbles that produce run-away inflation followed by asset-price collapses in several months time could shatter business confidence and potentially have profound implications for stability.
FDI reached a record $52.7bn in 2002 reflecting a high level of foreign investor excitement in the wake of December 2001 accession to the World Trade Organisation (WTO) and China’s pre-eminence among fast-growing developing markets. FDI in 2003 may still exceed the 2002 figure despite the Severe Acute Respiratory Syndrome (SARS) crisis, which afflicted the country in the first half of 2003. FDI was $43.56bn in January to October, a year-on-year increase of 5.81%. Contracted investment rose by 33.75% year-on-year to $88.68bn.
For the past few years, falling prices have prompted concerns about falling into a deflationary spiral, with some observers arguing that Chinese overproduction has allowed it to export deflation. However, the spotlight is returning to inflationary pressures. Consumer prices increased by 1.8% year-on-year in October, the biggest increase thus far in 2003. The increase was attributed to rising prices of agricultural produce as a consequence of bad weather and lower crop yields and the rising cost of energy imports outweighing falling prices of manufactures. Overall in 2003 consumer prices have increased by 0.8%. Prices have risen fastest in rural areas. This could exacerbate social tensions as rural incomes are rising much more slowly than in urban areas. It will also accelerate urbanisation..
The General Administration of Customs announced on 13 November that exports totalled $40.93bn in October, a 36.7% year-on-year increase, while imports rose to $35.19bn, a 39.7% year-on-year increase. This yielded a trade surplus of $5.74bn compared with $290m in September. The huge surplus will feed the concerns of China’s trade partners, especially the US, about China’s undervalued currency and increase pressure for a widening of its currency banding. The figures also revealed that Japan is the country’s largest trading partner with $107.86bn of trade in the first ten months, an increase of 31.4% year-on-year. Trade with the US, China’s second largest trading partner, totalled $102.48bn in the first ten months, an increase of 37% year-on-year.
Unsustainable growth
According to official statistics, the economy grew by 9.1% year-on-year in the third quarter. Analysts outside the government estimate that GDP growth could exceed 11% in 2003, despite the negative impact on global business confidence and consumer markets of the Severe Acute Respiratory Syndrome (SARS) crisis in the second quarter and the US-led war in Iraq during the first half. However, the 10% growth level is unsustainable, even given strong international demand for Chinese manufactures, and reflects a combination of central government deficit-spending, especially on infrastructure projects such as the Three Gorges Dam and the 2008 Olympic Games; local government spending on prestige projects, such as municipal buildings, bridges and airports; and increased spending by the middle class on private vehicles and home improvements and speculation in the property sector. Sectoral bubbles have been exacerbated by companies and entrepreneurs seeking a profitable outlet for funds that have been accumulated through overseas exports. Capital controls prevent overseas investment. The surge in construction is also having an impact on global resources markets, pushing prices upward by way of heightened demand. This over-reliance on one market is dangerous and a collapse in Chinese demand could see suppliers retrenching and shrinking capacity sharply, with a resulting impact on employment and local economies.
Stewardship of the overheating economy and management of foreign trade relations are the two most pressing tasks facing the government in late 2003. Steadying the economy will require timely and well-considered measures from the new leadership to prevent market distortions from becoming further exaggerated. Failure to steadily and carefully deflate asset price bubbles and cool overheated markets could jeopardise economic stability. It could also have a detrimental impact on the global economy. Companies are advised to increase monitoring of developments in their own sector and in the Chinese economy as a whole.
Economy shows signs of cooling
The Ministry of Commerce revealed on 12 November that actual foreign investment totalled $3.36bn in October compared with $5.16bn in 2002.
The figures suggest that fears about rapidly accelerating growth may have been overstated. The State Development and Reform Commission in late October had urged the government to take action to control overheating sectors of the economy. The concerns reflect the importance for social and political stability of maintaining strong, but balanced and sustainable economic growth. A boom comprising rapid credit growth, overinvestment and sector asset price bubbles that produce run-away inflation followed by asset-price collapses in several months time could shatter business confidence and potentially have profound implications for stability.
FDI reached a record $52.7bn in 2002 reflecting a high level of foreign investor excitement in the wake of December 2001 accession to the World Trade Organisation (WTO) and China’s pre-eminence among fast-growing developing markets. FDI in 2003 may still exceed the 2002 figure despite the Severe Acute Respiratory Syndrome (SARS) crisis, which afflicted the country in the first half of 2003. FDI was $43.56bn in January to October, a year-on-year increase of 5.81%. Contracted investment rose by 33.75% year-on-year to $88.68bn.
For the past few years, falling prices have prompted concerns about falling into a deflationary spiral, with some observers arguing that Chinese overproduction has allowed it to export deflation. However, the spotlight is returning to inflationary pressures. Consumer prices increased by 1.8% year-on-year in October, the biggest increase thus far in 2003. The increase was attributed to rising prices of agricultural produce as a consequence of bad weather and lower crop yields and the rising cost of energy imports outweighing falling prices of manufactures. Overall in 2003 consumer prices have increased by 0.8%. Prices have risen fastest in rural areas. This could exacerbate social tensions as rural incomes are rising much more slowly than in urban areas. It will also accelerate urbanisation..
The General Administration of Customs announced on 13 November that exports totalled $40.93bn in October, a 36.7% year-on-year increase, while imports rose to $35.19bn, a 39.7% year-on-year increase. This yielded a trade surplus of $5.74bn compared with $290m in September. The huge surplus will feed the concerns of China’s trade partners, especially the US, about China’s undervalued currency and increase pressure for a widening of its currency banding. The figures also revealed that Japan is the country’s largest trading partner with $107.86bn of trade in the first ten months, an increase of 31.4% year-on-year. Trade with the US, China’s second largest trading partner, totalled $102.48bn in the first ten months, an increase of 37% year-on-year.
Unsustainable growth
According to official statistics, the economy grew by 9.1% year-on-year in the third quarter. Analysts outside the government estimate that GDP growth could exceed 11% in 2003, despite the negative impact on global business confidence and consumer markets of the Severe Acute Respiratory Syndrome (SARS) crisis in the second quarter and the US-led war in Iraq during the first half. However, the 10% growth level is unsustainable, even given strong international demand for Chinese manufactures, and reflects a combination of central government deficit-spending, especially on infrastructure projects such as the Three Gorges Dam and the 2008 Olympic Games; local government spending on prestige projects, such as municipal buildings, bridges and airports; and increased spending by the middle class on private vehicles and home improvements and speculation in the property sector. Sectoral bubbles have been exacerbated by companies and entrepreneurs seeking a profitable outlet for funds that have been accumulated through overseas exports. Capital controls prevent overseas investment. The surge in construction is also having an impact on global resources markets, pushing prices upward by way of heightened demand. This over-reliance on one market is dangerous and a collapse in Chinese demand could see suppliers retrenching and shrinking capacity sharply, with a resulting impact on employment and local economies.
Stewardship of the overheating economy and management of foreign trade relations are the two most pressing tasks facing the government in late 2003. Steadying the economy will require timely and well-considered measures from the new leadership to prevent market distortions from becoming further exaggerated. Failure to steadily and carefully deflate asset price bubbles and cool overheated markets could jeopardise economic stability. It could also have a detrimental impact on the global economy. Companies are advised to increase monitoring of developments in their own sector and in the Chinese economy as a whole.