Tuesday, December 21, 2004

China's high-octane economy shifts into slower gear

SHANGHAI, China (AP) - Some economists are calling it a "soft landing.'' Others, no landing at all.

China expects to record economic growth of at least 9 percent this year and, according to many forecasts, will see only a slightly lower rate in 2005.

The local economy of Shanghai, China's bustling, designer-clad business capital, is growing even faster, with a 13th straight year of double-digit growth predicted for this year.

The government in Beijing is attempting to rein in the expansion of the world's fastest-growing major economy to more sustainable levels by boosting interest rates and changing other policies.

But booming trade, investment and domestic spending ensure that China will remain a major engine of growth.

"This is what we've been describing as 'no landing,' " says Andy Rothman, China strategist in Shanghai for CLSA Emerging Markets.

"Growth is slowing a bit, but down to what is still a very rapid pace.''

Increasingly affluent Chinese are spending more than ever on computers, entertainment, clothing and tourism.

A recent AC Nielsen Consumer Confidence Survey found the Chinese to be the most optimistic consumers among 28 markets studied, with 78 percent of those questioned expecting to be better off next year.

With the economy apparently steaming ahead under its own momentum, Beijing has dropped its policy of creating jobs by shoveling money into construction and other projects.

In addition to raising interest rates, Communist leaders have ordered energy-saving measures and told local officials to cut spending on pointless prestige projects and unneeded factories, roads and other facilities.

Those policies reflect a recognition that, caught between shortages of energy, steel and other resources and already severe environmental damage, even high-octane China faces limits to its growth.

"There's no such thing as an eternal feast,'' the old Chinese saying goes.

China already consumes a third of the world's steel output, 40 percent of all cement and about a third of all coal.

Electricity shortfalls were severe enough to oblige Shanghai to darken skyscrapers during hot summer months.

Railways turn away more capacity than they can carry. Widespread water shortages further limit industrial growth, experts say.

"China's economic growth picture has been rosy for years. But is it sustainable? And if so, for how long?'' the official Xinhua News Agency said in a recent report that noted it would be a "hard job'' to supply enough energy to meet the Communist Party's target of quadrupling the GDP by 2020.

"They have to slow it down. If they don't, it would be catastrophic in the long run,'' says Bill Overholt, Asia policy chair at Rand Corp., a Santa Monica, California-based think tank.

"The bill has to be paid.''

For a second year, China's leaders have proclaimed raising incomes for hundreds of millions of impoverished farmers their top priority - an aim crucial to further boosting economic growth and preventing political unrest.

What doesn't appear to be on Beijing's agenda is loosening control over the Chinese yuan, which is tightly regulated and trades only within a narrow range around 8.28 yuan per U.S. dollar.

An unexpected surge in the trade surplus to $9.9 billion in November could invite more pressure to loosen the yuan's peg to the sinking dollar from critics who contend it undervalues China's exports by as much as 40 percent, giving its manufacturers an unfair trade advantage.

Naming stability as its top priority, Beijing argues that its debt-loaded, fragile financial system must be insulated from exchange rate shocks.

"It's not an ideological or political thing. The arithmetic says it's not in China's interest to do it,'' said Overholt.

Regulators have vowed to eventually set flexible foreign exchange policies and have been gradually lifting restrictions on foreign exchange dealings by individuals and companies.

But as for actually revaluing the yuan, state media recently quoted Premier Wen Jiabao as saying, "To be honest, the more speculations there are, the less chance we will act.''

Though some foreign governments may not be getting the concessions they want, foreign companies are beginning to see real profits after two decades and some $555 billion in investment.

Few are pushing for potentially disruptive changes in the currency regime.

U.S. companies reported more than $8 billion in profits inside mainland China in 2003, according to a recent survey by the China Economic Quarterly.

And China's growth is spilling over in other ways: the country's No. 1 computer maker, Lenovo Group, has just bought International Business Machine Corp.'s PC business, and more overseas acquisitions are expected to follow.

The last time China's leadership engineered an economic slowdown, almost a decade ago, such an deal would have been almost unthinkable.

Back then, city dwellers worked for state companies, prices were government-set and private housing was almost unknown.

By now, countless state enterprises have been merged, shut down or privatized.

Though unemployment remains perilously high, millions of laid off workers have found jobs working in the private sector, service industries or foreign-funded companies.

And millions of urban Chinese own their homes. "The whole structure of the economy is completely different now,'' Rothman said. - AP

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