Business Times - 9 Feb 2001
http://business-times.asia1.com.sg/5/focus/focus21.html
Vigorous, yet vulnerable
Despite its robust performance last year, China's growth prospects for 2001
and the next few years are still underscored by uncertainty, says JOHN WONG
HINA
China ended 2000 with a strong 8 per cent economic growth, compared to the
7.1 per cent of 1999. The Chinese economy, like most Asia-Pacific economies
in the post-crisis period, has rebounded with higher growth; but China's
performance in 2000 is more remarkable in that it has arrested a seven-year
trend of declining growth.
Not long ago, some commentators started to speculate that the Chinese
economy, after 20 years of hyper-growth, might have exhausted its growth
potential and could well be in the transition to a more moderate growth
regime. The strong upturn in 2000 has put an end to such lower-growth
speculation.
Growth in 2000 was fuelled by exceptionally strong external demand with
foreign trade chalking up a record 32 per cent rise. Rising exports were
buoyed by strong economic growth in the US and the recovery of the regional
economies.
But for a large and inward-looking economy like China, domestic demand
(which accounts for nearly 70 per cent of its overall economic growth) has
been even more crucial. The growth of domestic demand in 2000 was the
result of the sustained proactive fiscal stimulus plus various government
measures to boost consumer spending.
In fact, Premier Zhu Rongji, who was widely credited for his efforts in
subduing the 1992-96 inflation by bringing the economy to a successful soft
landing, can now claim extra credit for having successfully reined in the
deflation of 1997-2000 as well.
For 2001, the Chinese economy has been variously estimated to grow at
7.5-8.0 per cent. But growth prospects for 2001 and possibly for the next
few years are underscored by considerable uncertainty. As China has now
been more integrated with the global economy, it has become vulnerable to
the ebb and flow of the international economy, particularly the rising
spectre of an economic downturn in the US, which is China's largest export
market (absorbing 21 per cent of China's total exports in 2000).
The Chinese economy is also susceptible to the looming global oil crisis.
Since 1995, China has become a net oil importer. In 2000, China imported 70
million tons of oil, or about 30 per cent of its total consumption. By
2005, China's import dependency for oil may well reach 50 per cent.
GOING GLOBAL
The greatest uncertainty surrounding the Chinese economy for the next few
years, however, is associated with its imminent accession to the World
Trade Organisation in 2001. The economic effects of WTO membership can work
two ways. Over the longer run, China's economy will clearly stand to gain
in terms of greater efficiency due to further economic liberalisation and
faster progress in domestic economic reform. But all eyes will be on the
short-term adjustment costs, including the political and social costs.
Specifically, both exports and imports may go up; but China's annual trade
surplus (which fell 17 per cent in 2000 to US$24 billion) may well shrink
further. The inflow of import-substitution type of foreign direct
investment (FDI) may be reduced while export-complementing type of FDI is
expected to go up. So would certain strategic, high-tech FDI. This explains
why some electronic and high-tech firms from Taiwan and elsewhere have
recently rushed to establish beach-heads in China.
China's WTO entry will expose all the major economic sectors -- banking and
finance, agriculture, and state-owned enterprises (SOEs) -- to the
challenges of the open market. But the actual sectoral responses will be
different, depending on their adjustment and preparedness.
What appears to be rather odd is that with WTO entry already on its
doorstep, the central government has still not mounted concerted efforts
(beyond paying lip service in the form of various directives) to actively
prepare its potentially exposed economic sectors to the coming WTO challenges.
Why such an apparent ineptitude on the part of Beijing? Firstly, the
half-reformed Chinese economy has developed considerable institutional
rigidity, which is further aggravated by the proliferation of many special
interest groups. It will not be easy for Beijing to introduce real changes.
Secondly, most of the adjustment will be borne by the provinces, which
control most of China's economic activities.
The outcome should be sufficiently clear. WTO membership is likely to
sharpen the political tension between the centre and the provinces. When
the crunch of the WTO dispute finally comes, Beijing will be at loggerheads
with the affected provinces and the special interests involved.
For the time being, however, Beijing can only wait and see. Basically, it
is still relying on its time-honoured but effective strategy of "touching
the stones to cross the river" (ie, a flexible trial and error approach) to
cope with all WTO-related contingencies. In any case, no real WTO effect
can be expected for the year 2001.
EXPORT-LED RECOVERY
In the meantime, Beijing's economic policy makers must be pleased to see
that most economic sectors (except for agriculture) are shaping up pretty
well in the recovery. Exports are surging; contractual FDI (though not
actual FDI) is rising; consumer confidence is returning; fiscal revenue is
expanding; and many SOEs are making profits for the first time in many years.
Above all, while most stock markets in the world have plunged, the Shanghai
and Shenzhen bourses remain the sole exception, soaring 125 per cent and 58
per cent respectively in 2000. Not surprisingly, the IMF, in its recent
forecast, has put China's economic growth in 2001 the highest among the
major economies.
Even if the US economy were to experience a hard landing this year, China
could still fall back on its domestic economic dynamics for much of its
economic growth. China's industrial output in 2000 grew at 11.4 per cent
(the highest since 1997), compared to 8.9 per cent of 1999. This translates
into 8 per cent GDP growth for 2000. Industrial growth was mainly driven by
the rapid expansion of the IT industry (namely, electronic and
telecommunications industries), which grew at 17.2 per cent to 583 billion
yuan (S$119 billion).
China's IT industry has now become the main pillar of its manufacturing
sector, replacing traditional industries like textiles, metallurgy and
chemical industries. (Some of these industries have remained sluggish due
to overproduction). This is the single most important aspect of the
structural change of China's manufacturing sector in recent years.
China's GDP in 2000 expanded 8.1 per cent in the first quarter, 8.3 per
cent in the second quarter and 8.2 per cent in the third, while it came
down to 7.6 per cent in the fourth. From the quarterly pattern of growth,
China's economic activities are usually slow in the first quarter (partly
due to disruption of the long Chinese New Year holiday) but high in the
last quarter. Growth for the fourth quarter of 2000 was dampened to 7.6 per
cent, in part because all the last quarters of the past few years had
experienced very high rates of growth. Nonetheless, the slip in the last
quarter of 2000 suggests that the rampant expansion of the first three
quarters might not be sustainable, thereby adding further uncertainty to
the forecast for 2001.
In terms of the sources of growth, the unusual export boom in 2000 has been
a major contributor. Foreign trade in 2000 grew at a record rate of 31.5
per cent to a total turnover of US$474 billion (S$824 billion). Imports
increased 35.8 per cent to US$225 billion while exports were up by 27.8 per
cent to US$249 billion, yielding a smaller trade surplus of US$24 billion,
when compared to 1999.
The export boom ran through the greater part of 2000, but showed signs of
losing steam in the last quarter. Japan, the US, the EU and Hongkong
remained China's major trading partners; but the US was still China's top
export market.
Of greater significance is China's changing export structure, marked by the
much faster rates of growth for the export of electronic and electrical
products (US$105 billion) and high-tech products (US$37 billion) than for
traditional items like textiles and clothing, toys, and shoes.
THE ZHU RONGJI WAY
For China, its domestic demand is far more important than external demand
as a source of growth. Thus, fixed assets investment for the first 11
months of 2000 rose by 11.7 per cent, a 4.9 per cent percentage point
higher than the previous year while domestic consumption increased 9.8 per
cent, a 3.1 percentage point higher. With rising exports, growing tourism,
and booming stock markets, urban consumption increased 10.7 per cent for
the first 11 months.
In fact, by the middle of 2000, most vestiges of deflation had disappeared
as the consumer price index was on the rise again, fuelled by higher food
prices, higher rentals, higher petrol prices, and higher public utility
charges.
It may be argued that higher domestic demand in 2000 is the successful
outcome of Premier Zhu Rongji's three-year efforts of fighting deflation.
Mr Zhu's package comprises:
A sustained Keynesian-style proactive fiscal stimulus for three years by
issuing a total of 360 billion yuan of bonds;
Opening up new sources of domestic investment and consumption by launching
the programme of developing China's western region;
Cutting interest rates seven times since 1996, and a slight loosening of
the monetary policy in 2000; and
Other measures like public sector salary hikes, taxing interest incomes
from saving accounts, and promoting "holiday spending" during major
festival periods like Chinese New Year and National Day -- the so-called
"holiday economy".
All these measures have, in varying degrees, contributed to the surge of
domestic demand in 2000, and hence also a higher GDP growth.
GENERATION GAP
The year 2001 is a crucial one for Beijing to lay the ground for the smooth
transfer of power to the younger fourth-generation leaders in 2002. A
prosperous economy arising from continuing high growth naturally
facilitates the preparation. How will the succession process impact
economic growth?
Admittedly, this is a delicate business. On the one hand, the leadership
needs to step up reforms and changes in order to cope with uncertainty
surrounding the economy. On the other hand, the leadership cannot embrace
disruptive measures and changes that will clash with its overriding
objective of maintaining stability required for the smooth political
transition.
Among the many urgent agendas for 2001, the government is expected to give
priority to two areas. The first involves the "deepening" of the ongoing
SOE reform. Under the prevailing zhuada fangxiao policy, the government has
continued to hang on to 500 or so large SOEs but have "let go" many small
and medium SOEs through some privatisation.
Mr Zhu has recently declared that he has fulfilled his three-year objective
of turning around many large SOEs. But all this may be deceptive. Many
large SOEs are still in need of vigorous restructuring, all the more so if
they are to survive the open competition once China is in WTO.
The government has recently taken measures to deregulate or even break up
the monopoly of some large SOEs in the petroleum, telecommunications,
railway, and power sectors. In 2001, many SOEs are expected to continue
with their management reorganisation while some will take to privatisation.
PetroChina, Sinopec and Unicom had their successful IPO outside China last
year. More SOEs are expected to go on public listing this year. Real
progress in SOE reform will ultimately boost China's economic growth.
Secondly, Beijing will also pay more attention to the rural issue, the
so-called "three nong problem" -- nongye, nongmin, nongcun (agriculture,
peasants, and rural development). In 2000, food production declined by 9
per cent. This by itself will not create a food supply problem, as China is
currently overstocked with unsold grain after many years of bumper harvests.
What is more serious is the widening of rural-urban income disparity. The
ratio of income differences for urban and rural residents in China is about
4, as compared with 1.5 for most developing countries. This raises not just
the social issue of rural poverty, but also the political question of
potential peasant unrest.
In any case, continuing rural poverty poses a threat to economic growth. If
rural incomes remain depressed, overall domestic consumption cannot keep on
rising.
In the long run, rural development can also operate as a new source of
economic growth. Suffice it to say that the rural problem is crying out for
greater attention. But rural development, like SOE reform, is a long-term
process. Still, the government has to make a start now.
Prof John Wong is research director of East Asian Institute
Copyright c 2000 Singapore Press Holdings. All rights reserved.
