China warned of cyclical risks to booming economy
Reuters, 11.11.03, 2:54 AM ET
By Ben Blanchard
SUZHOU, China, Nov 11 (Reuters) - As China's economy bounds along at breakneck speed, the government thinks it has reason to bask in the limelight.
The dark clouds that SARS threw over the country have lifted, and strong growth in the United States and Japan looks set to push China towards new heights in 2004, economic officials said at a forum in the eastern city of Suzhou this week.
But inflation, deflation, overheating and the prospect of rising interest rates in the developed world could rain on the parade, they warned, a view supported by economists.
"The Chinese are not sensitive to the notion of cyclical dynamics," said Gail Fosler, chief economist for U.S.-based business think-tank The Conference Board.
China should not be fooled into thinking that the 7.2 percent economic growth in the United States in the third quarter means the outlook for China next year is rosy, she said.
"After the election and in 2005, I think we are headed towards a sharp and pronounced cyclical tightening in the United States," Fosler said.
"When the rise in U.S. interest rates comes, it will be hard for China's credit system not to begin to price credit on a much more economic basis," the former head economist of the Senate Budget Committee said.
"A lot of enterprises which appear to be economic today, under those conditions would not."
China was also hoping global attention on what some countries say is an undervalued currency would be diverted by the improving world economy.
"This can help alleviate pressure on the renminbi to appreciate," said Li Deshui, head of China's State Statistical Bureau, who reiterated the country's long-held position that its fixed currency policy was correct.
BLIND INVESTMENT
With China's gross domestic product roaring ahead in the third quarter to an annual 9.1 percent, the potential for overheating was another source of debate, especially as industrial output in October soared an annual 17.2 percent, the highest pace in eight months.
"Some industries are engaging in blind investment where they will only get low levels of return," warned Zhu Zhixin, deputy head of the National Development and Reform Commission.
One of the main industries that China is worried about is the auto sector, where the fast clip of sales growth has attracted foreign car makers to invest billions of dollars.
"Clearly margins are going to be eroded," said Fred Hu, managing director of Goldman Sachs (Asia). "But it's still the most profitable automobile market in the world."
And despite fears raised by China's top statistician that the country could be facing twin evils of inflation and deflation, Hu maintained the situation was still "in the comfort zone".
"For a high-growth economy you can afford to have a higher inflation rate than the U.K. or U.S.," he said. "But over the last four or five years deflation clearly has posed a greater challenge than inflation."
Copyright 2003, Reuters News Service
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