China witnessed remarkable economic growth in 2003.
The world used to be sceptical about China's dramatic growth figures, but
most nations now regard China as a driving force in the economy of many parts of
the globe. Even the outbreak of SARS (severe acute respiratory syndrome) in the
spring did not destroy the momentum, thanks to the determined efforts of the
whole nation.
This year, concerns are arising that there is evidence suggesting that the
Chinese economy is showing signs of over-heating.
The actual increase of investment in 2003 was 30 per cent, the highest since
1979. As a result, major production materials, such as coal, iron and steel and
cement, as well as electricity, have been either in short supply or began to see
price rises in the latter half of the year.
However, the breakneck pace of investment growth only happened in certain
parts of the economy, such as real estate and automobile production, and it is
those areas that have been driving up the prices of production materials.
By contrast, most consumer goods saw price declines up to the end of
November. In other words, except for the manufacturers of construction materials
and some agricultural products, major sections of the national economy have been
over-producing, bringing about a drop in prices.
That is to say, although part of the Chinese economy is overheated, the rest
is still troubled by excess production capacity, which began developing as early
as 1998.
China's economy has now entered a new boom cycle. The latest downturn was in
2001, but the year of 2002 saw a strong upward turn.
It is good for China to see a long period during which the economy grows in a
sustainable way with a steady tempo rather than leaping forward in a short time.
This will allow the country to tackle problems occurring along the way with ease
and to adjust policies as needed.
The prospects for achieving this are very good, judging from China's current
situation and its long-term potential.
However, if the ongoing overheating in investment is not curbed in time, the
country will probably be stricken by deflation in one or two years. The reason
is that the investment will create more production capacity when there is
already too much.
For the Chinese economy at this moment, deflation is a real threat, although
it can handle an inflation rate of 5 to 6 per cent.
To make things worse, the heated investment growth has been accompanied by a
steep expansion of bank loans, which is similar to the investment fever we used
to see.
As we all know, bank loans were projected to grow by 15.2 per cent in 2003,
but the actual growth rate was more than 21 per cent, far beyond the predicted
figure.
The danger is that the investment growth is not backed by real demand.
Instead, a considerable amount of the investment is in the form of bank
loans. Banks are eager to make loans with their huge deposit balances.
When the economy advances at high speed, bottlenecks, like short supply of
iron and electricity, will emerge.
Under such conditions, the current growth is not sustainable in the long run.
Economic bubbles are inevitable in any fast-growing economy. When the bubble
bursts, some countries sink into financial or monetary crises, but some do not.
We should try to keep the bubbles as small as possible.
One of the successful examples in this regard can be found in the United
States. If the Federal Reserve of the United States had not raised interest
rates when it did, the bubble in information technology might have been much
larger than when it burst.
The government should not intervene in the everyday operation activity of
banks or enterprises, but rather keep overall control.
From the perspective of monetary policy, the measures to supervise and
administrate banks should be adjusted.
If the banks are prudent in making loans, investment fever will be cooled to
some extent.
With production capacity still too high as a whole and overall demand
relatively low, to maintain economic growth the government would have to
continue its current pro-active fiscal policy.
The State should invest more in projects related to the improvement of
production and people's life in rural areas to increase the efficiency of the
policy.
Also, measures should be taken to impose strict supervision on such
investments. The measures should be tailored to fit different sectors,
especially in the financial sector.
In this way, we can develop a market economy that is well-ordered and highly
efficient.
If macro control policies are put in place as needed, it will be possible for
the country's economy to grow by more than 8 per cent in 2004.
(China Daily)
