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Top analysts pinpoint problems
By Li Xiaowei and Guo Jian'er (China Daily)
Updated: 2005-04-21 08:55
SHANGHAI: Several prominent economists from some of the largest international
investment banks yesterday pinpointed the fundamental problems in the Chinese
economy, including the misalignment of currencies and interest rates, excessive
demand for imported materials and foreign pressure on the Chinese currency.
These are also the core issues that the central government and regulatory
authorities are addressing in financial reform and the current macro economy
adjustment programme.
At a conference on China's economic prospects hosted by the American Chamber
of Commerce in Shanghai yesterday, Frank Gong, head of China research at JP
Morgan, said the country's liquidity surge accompanying the sharp rise in
balance of payments surplus could pose a genuine threat to the economy's soft
landing.
In addition, the soaring property mortgage loans as well as the continuing
flow of hot money into the country's property market could potentially lead to
widespread bankruptcies and financial distress.
Gong explained that China's foreign exchange reserves accumulation had
significantly outpaced current account surplus and inflow of foreign direct
investments. The trend not only reflects inflow of hot money from international
investors but crucially, expectation of renminbi appreciation by domestic
households and companies.
The abundant and rising liquidity in the financial system has made market
interest rates stay at a stubbornly low level, despite the central bank's
27-basis-point rate rise in late October.
The combination of ample liquidity and low real interest rates is hardly an
environment conducive to containing investment growth, particularly in property,
Gong said.
Meanwhile, the huge liquidity and the easy overall monetary environment have
turned into a further unsustainable rise in property prices and worries about a
property bubble, he added.
China's recent measures on housing affordability suggest signs of excesses in
the national housing market, especially in Shanghai. Gong cautioned that, short
of a well-regulated and sound financial system, Shanghai and the whole country
as a whole cannot afford to experience dramatic property price booms and busts.
The share of consumer loans which are mostly mortgage loans relative to total
bank loans almost tripled in four years to reach 11.2 per cent by 2004. Plus,
capital has continued to flow into the property sector, despite credit
tightening last year.
"At the end of the day, at the macro level, the escalating property boom is
simply another symptom of a misaligned currency and interest rates," said Gong.
Highly dependent on imported raw materials, particularly oil, many economists
have questioned if China can sustain the high growth levels experienced in the
first half of the past decade.
"The simple answer is why not,"said Andrew Rothman, China Macro Strategist at
CLSA.
In fact, the country has just passed the peak growth rates in Chinese
consumption as the growth rates have been so high in the past that it is
impossible to continue rising at even higher speed.
In addition, consumption growth will be constrained by limited availability
of imported raw materials in the tight global markets. Physical constraints such
as shortages of power will also cap the growth rate.
"The growth rate of Chinese commodity consumption will also slow because we
expect the overall growth rate of China's economy to continue slowing," said
Rothman. CLSA estimated China's real GDP growth to decrease from 11-12 per cent
in 2003 to 8-9 per cent this year, and the annual growth to be at 7-9 per cent
through 2010.
Rothman also said that China is dependent on trade and foreign direct
investment was outdated. Last year, net exports were equal to only 2 per cent of
GDP and foreign investment accounted for only 7 per cent of total fixed asset
investment, down from 20 per cent in 1995.
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