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Editorial: Hard landing or soft landing for China?

Published by The Straits Times, Singapore on 2004-06-28

Without minimizing the contribution of the European Union or dynamic economies such as Singapore and India, it's no hyperbole to aver that the world's twin engines of growth today are the United States and China. The latter has registered annual growth rates exceeding an enviable 10 percent; so eager are international investors to tap into China's huge domestic market that they've been pouring some US$53 billion in foreign direct investment annually. And the Chinese financial institutions, eager to overcome the sluggish development record of the Mao Xedong years, are extending massive loans to the real-estate sector, manufacturing, and just about everything else. China's appetite for commodities is nothing short of insatiable; it also consumes more than 30 percent of the world's annual steel production. And because of aggressive export policies, China is building up huge reserves of foreign exchange; its trade surplus with the U.S., for example, is US$124 billion (S$213 billion), something that's become an issue in the current American presidential campaign.

All this growth - which some Western economists say is uncontrolled - has resulted in an overheating of the Chinese economy, spawning fears that inflation may rise beyond its current range of 3.5 to 4 percent. An inflation rate higher than 5 percent may be difficult to manage because the government's monetary tools are still not calibrated sufficiently to deal with economic overheating. No wonder there's increasing concern that China's economic situation is beginning to look like a bubble, and that the bubble may implode unless something is quickly done about it. Groupings such as the G7 - the finance ministers of the G8, the world's leading industrial states - privately say that China should let its currency, the yuan, become more flexible so that trade imbalances with the U.S. and others are drawn down. The current exchange rate of US$1=8.28 yuan has remained unchanged for a long time. China itself has indicated that it'd be willing to peg its yuan to a basket of foreign currencies, but not yet. It wants entry, however informal, into the G8, particularly since its economy is bigger than those of at least two G8 members, Canada and Russia. China also wants the G7 finance ministers - the G8's core economic unit - to invite it to their next formal meeting, scheduled for October. The Chinese - and their well-wishers - suggest that China's membership in the World Trade Organisation isn't enough to ensure the kind of comprehensive integration that's needed at a time when the global economy is still recovering from recession.

To their credit, Chinese officials aren't holding their breath for such invitations. They recognize that if the Chinese economic bubble bursts because of continued uncontrolled lending and over-investment, the economy may be headed toward a "hard landing," which means a crash. That would have hugely adverse repercussions for the global economy. In an effort to cool the economy, they have started to tighten credit granting through raising the required reserve ratio of banks. Banks are decelerating lending to overheated sectors such as urban construction. Prime Minister Wen Jiabao is reported to be considering raising interest rates in order to dampen growth somewhat - although if rates rise, much-needed economic development in China's still languishing rural areas may suffer.

Because China's exports remain strong, the possibility of a "hard landing" - which would happen if the annual economic growth rate falls below 3 percent - looks remote right now. In fact, if China is able to hold down its growth rate to around 8 or 9 percent for 2004 and into next year, its economy would still do fine without sacrificing expansion in rural areas. But the situation bears close monitoring, and no one knows this better than Prime Minister Wen. Like everyone else, he wants a "soft landing" - growth at a manageable pace.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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