Risks of Overheating is Over for China

By Sun Jianfang, Kang Yi
Published: 2008-07-23

From News, Page 7, Issue no. 376, July 14, 2008
Translated by Liu Peng
Original article: [Chinese]

China has averted the threat of its economy overheating, concluded a recent report issued by China's State Information Center (SIC) on the country's present economic situation.

The report also projected that the Chinese economy would likely to slow down further in the second half of this year.

Is the Chinese economy overheating in the first place? The question has drawn different answers from economists, with one camp maintaining that it has since 2003, while another that China was still developing and if its economic growth dropped too much too fast, the consequences would be more severe than overheating.

With the latest report revealing that the economy had been contracting marginally for seven months straight, some quarters started to express optimism  that Chinese regulators might relax the tight macro-controls imposed since last year to prevent overheating.

The EO spoke to economists from the private and public sectors to shed some light on the implications of the report. Those interviewed were Zhu Baoliang, chief economist for the economic forecasting department of the State Information Center; Chen Xingdong, chief economist of BNP Paribas Peregrine in China; and Zhu Jianfang, chief macro-analyst for CITIC Securities.

Overheating is Over
The EO: Do you think that China is rid of the risk of overheating?

Zhu Baoliang: The report showed that the main macro-economic indexes have declined for seven months consecutively,
and that the Chinese economy has continued to slow down its paces. Based on these indexes, I think the economy has begun to slide.

Chen Xingdong: To begin with, I don't think China has had an overheating problem since earlier this year. Instead, the current indexes reveal that China is likely to cool. Though we still register a GDP growth of about 10%, that is based on a production calculation. If based on expenditures , the growth rate has already decreased a lot, more than enough to possibly hurt the economy as a whole. 

As to the report, I have some doubts over the information gathered by the SIC. For example, the report said the investment in fixed assets had increased slightly, which was certainly not in line with the ground situation.

Zhu Jianfang: This round of economic growth has passed its peak, and judging from recent trends, China's economy will likely slow down further. This is embodied in three aspects:

Investment: During the first half of this year, the real investment, after discounting the high inflation factor, has only increased slightly.
Export: Affected by the yuan's appreciation, exports have seen much slower growth.
Consumption: A slowing economy could have an impact on consumption.

The exporting business would continue to slow down, imports may surpass exports, finally resulting in the trade surplus to shrink in the near future.
In one word, we are facing risk of an economic cooling, not over-heating.

Micro-economic Risks
The EO: The government has recently deployed economists to conduct field research on enterprises. Is China's micro-economy facing some exposure?

Zhu Baoliang: Enterprises are among the first to be hit if the economy slows down. Financial risks would also emerge, such as declining profits. In addition, investment and consumption would also be affected. Real estate and stock markets would then plunge.

Zhu Jianfang: At present, the tight monetary policy has affected the economic growth. For instance, enterprises face a shortage of capital to support their operation, thus lowering export production. The business environment and room for profits for enterprises have shrunk. As a result, the economy is likely to face a greater risk of a hard-landing.

Chen Xingdong: In handling the micro-economy, we need to prevent widespread bankruptcy among enterprises, especially those in the export and real estate businesses. If they went under, the non-performing loans at banks would increase, and in response,  banks would impose tighter loan policies.

Changes in Macro-controls
The EO: Is there any sign indicating that the Chinese government would loosen macro-control policy in the future?

Zhu Baoliang: The tight monetary policy won't be changed immediately. High prices remain a conern, especially when the producer price index (PPI) has climbed sharply in the past months. However, the fiscal policy might be loosened slightly.

Chen Xingdong: We have indeed noticed some signs of loosening up. Price controls have eased in some areas, for instance, the government raised fuel prices last month. In addition, the devastating Sichuan earthquake has eased credit controls in the province to support reconstruction work, which would require massive supply of material and resources, and these supplies may not necessarily be produced in Sichuan alone.

That is to say, if enterprises are producing goods and services needed in reconstruction, and they are short of funding, they may have easier access to bank loans in the name of reconstruction.

Another example is that the government has also raise the export tax rebate rate to some local textile and clothing enterprises. I believe the government would loosen-up macro-control policy in the second half of this year, but as to the degree, it remains to be seen.