Economists upbeat country's economic


Updated Thu, 12 Aug 2004 00:00:00 GMT

Experts are urging government officials to remain vigilant to ensure the nation's economy lands softly, despite encouraging signs of China's efforts to rein in its overheating economy are working.

"We should not merely fix our eyes on economic indices. We need to ... monitor ... economic development to prevent the economy from overheating," said Fan Gang, director of China Reform Foundation's National Economic Research Institute.

If China's economy grows too fast, the subsequent landing will likely be hard; for example, economic growth may fall below 7 per cent, Fan said.

"Eight per cent annual growth is necessary to ensure China's economy lands safely," Fan said.

In recent months, the spectre of a hard landing appeared to have diminished, due to China's concerted attempts to slow the economy, which had grown 9.8 per cent in the year's first three months, and 9.6 per cent in the second quarter.

Recent statistics suggest the year-on-year growth rate of fixed-asset investment, a key gauge of corporate production activity, slowed from 43 per cent, in the first quarter, to 28.6 per cent in the second quarter.

The statistics also indicated the growth rate of investments in some overheating industries - such as aluminium, steel and cement - fell notably.

While many analysts are applauding the fast drop in fixed-asset investments, Fan said a high ratio in investments is essential to stimulate China's economy.

"I do not think China can follow the US policy of maintaining the growth rate of fixed-asset investments at merely 15 per cent," Fan said.

"The United States is a mature market, with well-established infrastructure ... China's industrialization is just starting. We need investment to build infrastructure ... to stimulate the economy."

Fan suggested the current stage of China's economy requires an annual, 40-per-cent growth in fixed-asset investments. But, he added, an investment hike in excess of 50 per cent would be hazardous.

"China needs investment growth at a steady pace for dozens of years. But the problem is some local governments pool all investments within their tenure of five years," he said.

Yuwa Hedrick-Wong, MasterCard International's economic adviser for Asia-Pacific, suggested China's economy doesn't actually have to land.

"Overinvestment is very much a distortion of State investments in some sectors, but not a real reflection of China's whole economy," Hedrick-Wong said.

"Reducing the growth rate from 11 per cent to 9 per cent is not 'landing,' but shifting from acceleration to cruising."

Some media outlets have reported small and medium-sized enterprises (SMEs) and private businesses so far have born the brunt of China's credit-tightening policies.

China's banks have stopped lending to SMEs and private companies because they do not know how to assess the firms' credit risks.

The banks also do not know how to assess the liquidity risks they face as a result of the government's credit-tightening measures.

Fan suggested the government's macroeconomic adjustment will benefit SMEs and private companies in the long run.

"It is interesting to note private companies, for the first time in history, are triggering a new round of investment," he said.

Very much like the State-run sector, China's fledgling private businesses also tend to follow suit and splurge on new investment projects, Fan said.

Since they are more vulnerable compared with State-owned enterprises when defending themselves amid economic turmoil, difficulty in borrowing money, even if temporary, will likely help them dodge unwanted risks, experts suggested.

Fan said the government's macroeconomic adjustment can help companies wind their way through the market's ups and downs.

"The credit-tightening policies will result in a shortage of capital for SMEs in the short term, but, in the long run, they will see the benefits," said Hedrick-Wong.