China: Price wars pose threat to growth objective
02/16/98
China Daily
Copyright(C) 1998 CHINA DAILY
Bitter price wars have put a smile on the face of Chinese consumers lately, but manufacturers are gritting their teeth as profit margins vanish.
Economists argue that if prices continue to nosedive, China could be caught by lack of effective demand, raising concerns over the feasibility of this year's target growth rate of 8 per cent.
In order to achieve that goal, China needs to promote exports -- which will be far from easy, given the pressure of devaluations by Southeast Asian countries -- and implement measures to stimulate domestic demand.
The planned economy long precluded effective distribution of inputs and distorted output. Growth was often the result of blind, repeated investment in disregard of effective demand.
VCD players provide a good example of the problem. About 10 home VCD player brands are currently the subject of dazzling TV ads. But the more advanced DVD (digital video disc) developed abroad is set to replace VCD in no time.
A senior government leader warned a blind boom of VCD player production across China would only lead to a bust in one or two years, and hence to more unemployment.
The government has decided to tilt investment towards agriculture, infrastructure and new technology this year to improve the efficiency of the economy.
The information and housing industries may also turn out to be two new growth points for the Chinese economy, analysts said.
There are more than 50 million square metres of apartments standing empty nationwide -- the fruit of billions of dollars in bank loans.
Measures have been taken to provide ordinary people with the credit they need to buy their own apartments this year.
In agriculture, investment will go principally to medium and small-scale water conservancy projects that will eventually increase farmers' income and rural purchasing power.
As price wars continue in cities, smart traders have begun to explore the rural market of 900 million consumers.
Economists are also expecting increased investment in railways, roads, telecommunications and environmental protection projects this year.
The government's investment plans are somewhat reminiscent of US President Franklin D. Roosevelt's policy of massive infrastructural spending in the 1930s to beef up the US economy.
These enterprises account for one-third of China's total industrial output, but many of them are small-scale, family-run firms unwilling to accept outside investment for expansion.
It is not quite clear how the government will help restructure these firms, but some economists are suggesting they shift their focus away from manufacturing to the service sector.
If domestic supply and demand are effectively balanced, there will be sustained growth in GDP. But it could take years to achieve that goal.
In the immediate term, China has to rely on exports to finance its GDP growth this year.
According to the State Statistics Bureau, last year's exports contributed 2 percentage points to GDP growth.
However, China is facing an unprecedented crisis in exports as devaluation in Southeast Asia bites deep.
In addition, China has yet to enter the World Trade Organization, and hence is liable to unfavourable trade terms.
Nonetheless, China retains certain advantages: lower labour costs (even after the Southeast Asian currency devaluations); stable domestic production; and emerging markets in Latin America, Africa and Oceania.
In the long run, economists are arguing, China should follow the United States' example and increase effective investment abroad to help boost its exports.
The US is increasingly relying on its foreign investment to sustain a trade surplus. In other words, more and more US exports are achieved through local sales by transnational companies.
Another factor affecting the Chinese economy relates to the rural enterprises whose growth rates are starting to slide after two decades of rapid expansion. |
