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Strategies & Market Trends : China Warehouse- More Than Crockery -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (2527)	1/21/2004 10:36:53 PM
From: RealMuLan	Read Replies (1) \| Respond to of 6370

Hamish McRae: What happens in China will affect us all 22 January 2004 Today is the start of the Chinese New Year - the year of the monkey. China enters it with its economy racing ahead, delivering growth that is having a profound effect not just on China, but also on the rest of the world. On Tuesday the Chinese authorities disclosed that the economy had grown by 9.1 per cent last year (see first graph), leading western economist to calculate that growth in the final quarter must have been close to 10 per cent. Looking ahead, the general view seems to be that there will be another year of similarly rapid growth, maybe back to 7-8 per cent, maybe up to 10-11 per cent. But from a global point of view it does not really matter, for even if the growth rate falls back a bit, China is already changing the world. Last year it supplied about one-third of the additional growth generated by the world economy, more than double the contribution of the eurozone. China has just become the world's second largest importer of oil, after the United States. It also consumes 36 per cent of the world's steel and 55 per cent of its cement. Commodity imports rose to nearly 7 per cent of GDP in 2003 (next graph) and may go higher this year. Its motor boom has led it to become an even larger importer of car components (up 84 per cent last year) and cars themselves (up 63 per cent). Machinery imports have also soared and now account for more than double the proportion of GDP that they were in the middle 1990s (third graph). From the point of view of China's regional trading partners this is great news. Australia has remained one of the fastest-growing developed economies in the world thanks to its exports to China. India has nearly 8 per cent growth, helped in part by its exports too - India now has a trade surplus with China. Any country that is in the machinery business - Germany or Japan for example - benefits too. But the pressure China is putting on world resources is starting to have other more negative effects. For example there has been a surge in shipping rates, which is great for anyone in the shipping business but increases the cost of transport for the rest of us. Unsurprisingly, considering the surge in demand, commodity prices, particularly of metals, have shot up (see final graph) and the oil market is apparently the tightest it has been for several years. If we all have to pay more at the pumps for petrol this year one of the main reasons will be the demand for oil from China. Thus China, with the US, has become one of the two principal locomotives pulling along the world economy. Directly or indirectly it affects every one of us. So what are its prospects during the year of the monkey? I think that for once the conventional view is probably the right one: there will be another year at this cracking rate of growth. There is a huge surplus of labour, not just from the land but also from the inefficient state-owned industries, which are being run down and/or privatised. (Funny, is it not, that Margaret Thatcher's policy of de-nationalisation should have become a major activity for the still-Communist Chinese?) That keeps the cost of labour down, helping hold down inflation. Exports remain strong, particularly to the US. America seems content to continue its enormous trade deficit with China and to continue to invest in joint ventures and local plants. We don't have full figures yet but foreign direct investment into China is expected to have been a record $55bn (£30bn) last year. Obviously China will need to make some policy gestures to the US. For example it will loosen up on imports from the US and may even make some relaxation of the link between the yuan and the dollar. The fall of the dollar, meanwhile, has made Chinese exports more competitive in non-dollar markets. That too will drive export growth. So what could go wrong? Dismiss the thought of a trade war with the US, for it is in neither side's self-interest to allow that to happen. The biggest threat is a financial breakdown. Non-performing loans, that curious phrase to describe loans where the borrower can't service the interest, let alone pay back the principal, are estimated at more than 40 per cent of the total. The point here is that Chinese banks are not really banks in the sense that we know them: they are state-owned vehicles through which the government puts funds into industry. So the debts are a charge on the Chinese taxpayer, not private shareholders. At some stage, however, the government has to correct their balance sheets and bailouts have now begun. The problem is that writing off the debt without reforming the lending practice is useless - a bit like the 1970s in Britain when the government kept bailing out nationalised industries without reforming their management. As an expert on the Chinese economy, Don Straszheim, points out: "Attention must be paid to establishing new banking practices - loan committees, record keeping, independence, judgment and accountability." That will eventually happen. One of the extremely interesting aspects of Chinese economic management is its ability to learn. In the case of banking there is an established international model of good practice: all China needs to do is to apply it. But the switch will take time and actually there is a reasonable argument for doing things slowly. The poor old Chinese taxpayer will have to stump up but the longer the delay and the greater the growth of the economy, the larger the revenues available to correct these errors. It is a balancing act not so dissimilar to the write-offs of bad debts that western banks have had to do from time to time. The trick is to wait until profits are solid enough to write off bad debts in an orderly manner. But of course the point above stands. There is no point in undertaking write-offs unless the fundamental lending practices are changed. Even if it avoids a banking meltdown there are other threats. Growth at this rate becomes harder to sustain and at some stage the country will have to come off the trajectory. It is the unexpected problems that often trip economies up. Meanwhile, the year of the monkey looks like another cracker, and expect us here to feel the effects of that. 21 January 2004 21:36 Search this site: Printable Story news.independent.co.uk