China Struggles To Rein In Strong Economic Growth
BEIJING -- A sharp pickup in the pace of China's economic growth underscores the challenges Beijing faces in trying to overhaul the country's vast, far-flung economy and has reignited debate about the best way to guide it.
China's statistics bureau announced yesterday that gross domestic product, the value of all goods and services the nation produces, expanded 11.1% in the first quarter from a year ago, an acceleration from the 10.4% year-over-year growth recorded for the previous quarter.
All major indicators -- including retail sales, factory output, capital spending and inflation -- accelerated during the period, raising new worries about excesses in an economy that has grown by more than 10% a year for four straight years.
Concern among Chinese investors that the government would respond by seeking to slow growth by raising interest rates sent the Shanghai Composite Index down 4.5%, even before the economic data was released, and contributed to weakness in markets across Asia.
Global markets didn't sell off as much as they had on Feb. 27, when an 8.8% plunge in the Shanghai index helped trigger a slide in stock markets around the globe. Still, in stock trading around Asia, Japan's benchmark Nikkei index had its worst session in a month, Hong Kong's Hang Seng Index closed down 2.3% and Singapore's Straits Times Index lost 3.2%. The pan-European Dow Jones Stoxx 600 Index shed 0.4%, and major European markets were mixed, with London, Paris and Frankfurt all down. In the U.S., meanwhile, the Dow Jones Industrial Average edged higher for a sixth consecutive day of gains as investors looked past the stock drops and celebrated a selloff in crude oil.
China, which boasts the world's fourth-largest economy, has had a record-breaking run of growth that is the envy of many. But this has been accompanied by rising inequality and environmental degradation -- and, some economists believe, an increasing risk of crisis in its still-immature financial system and capital markets.
The sources of China's success are becoming some of its biggest problems. Its world-beating export machine is piling up ever-larger trade surpluses, heightening political friction with the U.S. and Europe. Chinese companies and local government bodies have also been pouring money into factories, industrial parks, toll roads and other projects at such an astonishing rate that it raises worries they are building many wasteful or unneeded projects that will create a drag on the economy in the future.
China's top leaders say they want to change this pattern, and have called on companies to focus more on the domestic market and less on exports, while also changing tax and welfare policies to put more money in local consumers' pockets. They have urged local governments and companies to be more cautious with new investment projects, and have made it harder to get such projects approved.
So far, as the new numbers demonstrate, there is little evidence these measures have been effective: China's trade surplus doubled in the first quarter, to $46.4 billion, and urban fixed-asset investment expanded 25.3%, accelerating from last year's 24.5% pace. Nicholas Lardy, a China specialist at the Institute for International Economics in Washington, said the new report shows the Chinese have "still not been successful at working toward the more balanced growth strategy that they talk about."
Exports and business investment remain very strong while "consumers are still socking away a lot" -- a combination that will keep China's surplus with the rest of the world growing. With overall growth speeding up rather than moderating, and structural problems only intensifying, there is now growing pressure on the leadership to accelerate its program.
China's State Council, or cabinet, met to discuss the economic figures a day before they were released to the public, and in a highly unusual move released a statement shortly after the data was published yesterday. It said administrative restrictions on growth -- specifically, controls on new investment projects and instructions to banks on how much they can lend -- would be strengthened this year. The statement didn't mention possible adjustments to interest rates or the currency, although most private-sector economists are now expecting a faster rise in both borrowing costs and the level of the yuan this year.
In contrast to the U.S. and other nations with mature economies, China still relies more on administrative controls and less on interest rates and other market mechanisms to keep its economy from growing so fast that it leads to inflation or unsustainable bubbles. A sharply higher yuan, for instance, would tend to restrain exports and brake economic growth, but China has been unwilling to let its currency float freely.
The State Council said its goal is to "prevent the economy turning from excessively fast growth to overheating, avoid large fluctuations, and realize both sound and rapid development of the national economy." Such language indicates that leaders are trying to address excesses while keeping the expansion going fast enough to create many new jobs.
"One very important lesson we have learned is not to make excessively large policy adjustments, but rather to take small, micro steps, and fine-tune them. The aim is to avoid a hard landing of the economy," said Li Xiaochao, spokesman for the National Bureau of Statistics, as he announced the GDP data in Beijing.
Jonathan Anderson, chief Asian economist for Swiss bank UBS AG, said the official policy response is likely to be measured, as he believes the surprising first-quarter growth reflects one-time factors, such as exporters making shipments early to avoid tax changes, that won't recur later in the year.
Moreover, the structural problems Chinese leaders are trying to address are unlikely to have short-term solutions. "There are serious downsides to China's current economic structure, but those downsides will not grind the economy to a halt this year," said Louis Kuijs, an economist in the World Bank's office here.
Indeed, Mr. Li, the statistics-bureau spokesman, emphasized that China's economy isn't yet showing signs of overheating. While headline inflation is high, at 2.7% in the first quarter as measured year over year, he said a measure of "core" inflation that excludes volatile food and energy prices was up only 0.9%. Mr. Li also said China doesn't have shortages of raw materials or bottlenecks in transportation, other classic signs of growth getting out of hand.
Chinese authorities have so far adjusted policies only very gradually, and less aggressively than many outside analysts are advising. Key levers of economic policy, such as interest rates and the currency, still seem to be at levels that stimulate economic growth rather than retard it.
"The root of overheated investment is China's excessively low interest rates," said Ha Jiming, chief economist of China International Capital Corp. in Beijing.
Over the past 12 months, the central bank has raised benchmark borrowing costs three times, by a total of 0.81 percentage points. (Interest rates in China are traditionally multiples of nine.) But with interest rates low -- standard rates stand at just over 6% -- small increases are unlikely to do much to deter borrowers from taking out new loans.
Mr. Lardy, the Washington economist, said interest rates are increasingly important in China. The state sector now gets only 40% of the loans, down from about 80% a decade ago, and higher rates are likely to slow borrowing by consumers, small businesses and corporations outside the state sector. "Interest rates are way too low for an economy growing at 11%," he said. Allowing the currency to rise would give the Chinese central bank more maneuvering room to raise rates, he added.
The latest International Monetary Fund forecast for the world economy predicts China will grow by 10% this year and only slightly slower -- at 9.5% -- next year. IMF economists noted that China -- and India -- "have continued to outperform expectations" and said "it isn't clear that the Chinese economy will slow as a result of limited tightening measures introduced in 2006."
In contrast, the IMF expects what it calls "advanced economies" -- those of the U.S. and other industrialized countries -- to grow only 2.5% this year.
From: Wall Street Journal, By ANDREW BATSON
Date: Friday 20, 2007 Back