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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: TobagoJack who wrote (38688)	9/23/2003 1:39:32 AM
From: elmatador	Read Replies (2) \| Respond to of 74559

Concerns over the world's fastest growing economy <<Don't know why: Missed this one over the weekend.>> By James Kynge in Beijing Published: September 19 2003 15:34 \| Last Updated: September 19 2003 15:34 Vast and seemingly contradictory, the Chinese economy arouses a panoply of passionate but polarised analysis. An 8.2 per cent expansion in GDP in the first half of this year made China the world's fastest growing large economy. It overtook the US last year as the prime destination for foreign direct investment, pulling in $52.7bn. Its competitiveness in manufacturing is such that its trade surplus with the US outstripped that of Japan in 2002, rising to $103bn. Yet these positive readings, pessimists say, are undermined by grave concerns over the sustainability of China's growth model. There are clear similarities between China now and several south-east Asian economies before they were engulfed by the financial crisis of 1997-1998. In 2002, investment accounted for 42 per cent of gross domestic product. The ratio is rising again this year. Economists identify bubbles forming in several sectors; property, steel, cement, aluminium, and possibly autos. Oversupply in 89.7 per cent of manufactured product categories has led to price wars and thin corporate profits. China's model, some analysts say, relies on deriving growth from ever greater investment inputs that yield ever diminishing returns. "There are only two options for the Chinese government," says Eddie Wong, chief Asian strategist at ABN Amro in Hong Kong. "One, to try to engineer a slowdown now and hope it will be a soft landing or, two, allow the investment ratio to continue to rise until it blows up." Whether or not such domesday scenarios are justified is a matter for debate. What is clear, however, is that if Chinese growth falters or slumps, the impact on the rest of Asia and the US would be considerable. In 2002, China's GDP growth accounted for 15 per cent of the world's total. In trade, the figures are even more stark; 60 per cent of the world's export growth and a similar proportion of import growth was derived from China. Asian trade partners, which run an overall trade surplus with Beijing, see China as a locomotive for the region. A slump in China's growth rate would therefore depress the China-bound export of raw materials, intermediate products and machinery required by factories in the emerging "workshop of the world". The US exposure to China's fortunes is no less important. The hard currency (mainly US dollars) that China earns from its trade surplus, foreign direct investment (FDI) and inflows of "hot money" are recycled to purchase US government securities. This has conferred on China the distinction of being - alongside Japan - one of the two main financiers of the ballooning US budget deficit. Therefore, if Chinese exports, FDI or hot money inflows were to decline sharply, Beijing would have to cool its purchases of US treasuries and Washington could have trouble funding its deficit. At the moment, there appears little cause for alarm. China's dollar assets show no sign of falling. Its foreign exchange reserves have surged to a current $365bn, up from $298bn at the end of 2002. The trade surplus was $8.9bn in the first eight months of the year, and actual FDI rose 26.3 per cent to $33.35bn in the first seven months. Hot money has also flooded in. However, there are two main threats to this equilibrium. One is that pressure from the US, Japan and EU on Beijing to revalue the renminbi, China's currency, achieves its purpose. An appreciating renminbi could erode the trade surplus, curb inflows of hot money and give direct investors pause to reconsider China's attractiveness. The other threat is that the domestic investment bubble could burst. There are few reliable pointers on whether or when this could happen, mainly because Beijing still wields significant control over fixed asset investment through its state-owned enterprises and fiscal stimulus packages. However, if the bubble were to burst, the impact on GDP growth, unemployment and consumer demand would be considerable. Under such conditions it is possible that hot money would no longer flow into China and FDI would also take a hit - thereby reducing US dollar assets and curtailing the ability of the government to buy US treasuries. China's policymakers have recognised that they have to tackle the problem of overheating in order to achieve a "soft landing". The central bank is trying to rein in runaway money supply, but so far with little success. Loans have also been growing at a disturbing pace, climbing 23.1 per cent in July, compared to just 10.9 per cent at the start of the year. These loans are fuelling sharp increases in fixed asset investment - to the extent that an unhealthy 70 per cent of GDP growth in the first half was derived from investment, according to Qiu Xiaohua, deputy director of the National Statistics Bureau. In recent weeks, the authorities have started to take aim at the most egregious example of overheating: a property glut exacerbated by inflows of "hot money" that may have amounted to around $30bn by the end of July. But the restrictions announced on property investments and project lending have so far had little obvious effect. Economists said that Beijing was likely in coming weeks to issue new rules and incentives to curb lending and overheating. But it remained uncertain as to whether China can tame its torrid growth without causing a slump that may damp demand throughout the region and curtail the ability of Beijing to continue financing the US budget deficit.