Analysis: Debate reignites on China growth
By Sonia Kolesnikov-Jessop
UPI Business Correspondent
Published 1/21/2004 2:44 PM
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SINGAPORE, Jan. 21 (UPI) -- The latest GDP data in China has reignited the debate on whether or not the Chinese economy is overheating, especially as official data are viewed as well below the reality. With the economy firing on all cylinders it is now reaching a bottleneck which will become even more apparent to the government during the first half of this year, triggering a monetary tightening, experts suggest.
The government announced Tuesday that fourth quarter gross domestic product growth in 2003 was 9.9 percent year-on-year, the fastest quarterly growth in seven years. Overall GDP growth in 2003 clocked in at a staggering 9.1 percent, after 8 percent in 2002 and the strongest since 1997. Interestingly, third quarter growth was revised upward from 9.1 percent to 9.5 percent, proving consistent with monthly indicators of production, investments and exports.
Many economists believe that the government's official data under-estimates the strength of the current growth, which some put as high as 13-15 percent
"In our view, actual economic growth is closer to 11-13 percent year-on-year, as we suspect that the growth momentum in the service sector is grossly underestimated," said CSFB in a research note.
Jun Ma, economist at Deutsche Bank, believed there is room for further upward revisions to the 2003 GDP figures given that investment growth and export growth accelerated by 9 and 13 percentage respectively in that year.
"We will not be surprised if 2003 GDP growth rate is later revised up to 9.5-10 percent. Given the strong economic performance in 2003, we will review and likely revise up slightly our 2004 GDP growth forecast, which currently stands at 8.4 percent," Ma said.
He pointed that for the first quarter of this year, the significance of the data release lies in the up-trend in the fourth quarter growth. "Looking at the last ten years' historical data, we found that if a quarter's year on year growth reaches 9.5-13 percent, on average the growth rate of the subsequent quarter drops by only 0.2 percentage points. This suggests that as the economy was still accelerating into the 10 percent range in the fourth quarter, growth in this quarter is likely to remain at around 9.5 percent," Ma predicted.
Recent months have produced evidence that growth has become too rapid, creating supply bottlenecks, especially in power and transportation, economists said.
Excessive capacity or inventory formation and rampant speculation also
endanger the sustainability of the growth, they added.
Industrial production growth in December was 18.1 percent year-on-year, driven by strong domestic demand and by the boom in exports (up 50.7 percent year on year that month). December retail sales growth rose an annual 10.9 percent, the highest since mid-2001.
State fixed investment was slower in December, but remained strong at an annual 23.3 percent, after a 25.3 percent increase the previous month and a full year growth rate of 26.7 percent, the strongest recorded since 1994.
The bottlenecks in the economy have become more apparent with frequent power outages, interrupting production and economists believe the situation will deteriorate further in the first half of this year.
Morgan Stanley analyst Andy Xie pointed that electricity production grew by 14.3 percent in the first 11 months of 2003, while it had grown on average by 7.8 percent during the preceding 10 years. China has been growing its capacity for electricity generation at about 8 percent per annum. "Due to the strong demand in the past two years, the current level of electricity production is about one-tenth above trend," he pointed.
Brownouts have persisted through the summer of 2003 and have become
widespread even among underdeveloped interior provinces. Some provincial governments blamed it on the impact of poor rainfall on hydropower generation, but Xie believes this only explains one-tenth of the shortage.
"Electricity shortage is a binding constraint for economic growth in
2004, in my view. The accelerated pace of putting up capacity would
only have results in 2005," he said.
The overheating debate among government officials ended abruptly after Premier Wen Jiabao comments against the overheating camp in November.
Indeed, on Tuesday, while making the announcement China's top statistician denied that the country's economy was overheating, and said abrupt changes to economic policy were unnecessary. He also pointed the State Council had ordered restrictions on further investment in some of the fastest-growing industries in order to prevent such overheating.
Private economists acknowledge that the government has been pursuing
policies to slow investment. Learning from the over-investment saga of 1993, it has announced capacity projections for many industries to deter excessive capacity formation. However, Xie points it may be too late for industries such as steel, aluminum, autos and chemicals.
The government is also trying to curb excessive credit expansion, by reining in credit and pushing forward banks restructuring. Loose credit policy has been causing rampant speculation, especially in commodities, which are becoming too expensive for Chinese growth, economists say.
But, they also believe that pressure on the government to act is intensifying, primarily by slowing the rapid expansion in industrial capacity and in bank credit.
"We expect the government will tighten monetary policy aggressively with hikes in benchmark interest rates starting about the middle of this year and cumulating at least 200 basis points over the next 12-18 months. We could also envisage the government initiating an austerity program in a vein similar to the one in the 1990s to adjust investment behaviour," said CSFB. "The downside risk is that the government could be forced to hit the economic brakes harder than expected, which may hurt sentiment, but we believe that robust consumption will help offset an investment correction and help engineer a soft landing in GDP growth," it added.
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