No China crisis for economic powerhouse

Despite rising property prices and a festering global currency dispute, growth is set to surge, writes CLIFFORD COONANin Beijing

RISING INFLATION, surging property prices and increasingly thorny currency issues are set to dominate the agenda in China during 2011.

Beijing will be under intense pressure to stabilise prices and maintain growth in the world’s second-biggest economy.

The broader economic picture remains upbeat. Foreign direct investment leapt 38.17 per cent in November – foreign companies poured €31.3 billion into China’s services industry in the first 10 months of the year, up nearly 30 per cent on the previous year.

The wider economy is expected to have grown by 10 per cent in 2010, while unemployment is estimated to have run at just over 4 per cent.

These figures are all the more remarkable when you consider that just over 30 years ago, China’s financial health was only of interest outside the country to a handful of observers.

“The overall outlook for China’s economy in 2010 is outstanding,” said Huang Weiping, an economics professor at Renmin University. “We’ve seen 6.1 per cent growth in the first quarter of 2009 turn into 11.9 per cent a year later and annual GDP growth for the whole of 2010 will be 9.8 per cent. So you can see China shedding the influence of the global economic crisis.”

Ye Tan, an independent economist and commentator, describes 2010 as a “transformation year”, although she said in 2011 most people would be still be worried about the real estate market, low-income housing, inflation and the currency.

“We can still see problems: real estate prices are still increasing, and the macroeconomy still relies on investment,” Ye added. “But there are positive changes also taking place, such as the government putting emphasis on housing for low-income groups and improving the social welfare system.

“It’s harder to transform China these days than it was 30 years ago when everyone was equally poor. Now the main target of transformation is to reduce the gap between rich and poor, to redistribute resources and moving the new power structures, the monopolies, is going to be tough,” she said.

House prices rose for an 18th month in November, despite measures including suspending mortgages for third-home purchases and a promise to speed up trials of property taxes to restrain foreign capital and rein in property prices.

In October, the People’s Bank of China increased interest rates for the first time in three years and raised borrowing costs for a second time on Christmas Day to control asset bubbles.

“We introduced about 15 measures this year but it appears that they were not well- implemented,” said prime minister Wen Jiabao on December 27th. “I believe that after some time, the home market will return to a reasonable level with our efforts.”

The importance of controlling house price increases was underlined by Wen when he said measures to curb the country’s property market had not been well implemented and restated his goal for property prices to return to a “reasonable level” during his term that ends in 2012.

A major social problem in China these days is that many of the young workers and graduates who are driving economic growth cannot afford to buy an apartment. As a consequence they cannot marry, become dissatisfied and start to complain about their lot.

The possibility of instability is something the government is anxious to allay. Moreover, next year it plans to build 10 million government-subsidised homes, almost double this year’s target of 5.8 million units. Completions of subsidised units reached 3.7 million this year.

A report by an economic analysis team under the auspices of the state council – China’s cabinet – carried in the China Economic Times, noted that inflation was following a stable trajectory and that fears of a bubble economy were easing as growth stabilised.

While the government think tanks tend to paint a positive picture, but are slow to highlight negative elements, they also reflect national policy direction and are important indicators.

“We expect that annual growth in 2010 will come out at 10 per cent, and this figure will remain around 9 per cent next year, with inflation controlled at below 4 per cent,” the report stated.

Part of the reason for their rosy view is that domestic consumption is still growing, while exports are also accelerating.

“The overheating economy and inflation have been reduced step by step, the risk of a bubble has been reduced too,” it noted.

We can probably expect a more sophisticated approach from the central bank during the year.

The People’s Bank of China is expected to raise interest rates so as to alleviate negative real interest rates in the first half of 2011 while inflation pressures are large, government economist Ba Shushong told the central bank-sponsored Financial News.

However, Ba said the bank might look to other instruments, such as the reserve requirement ratio for banks and open-market operations.

The fear is large rate increases may attract cash inflows at a time of very low interest rates for currencies, including the euro and dollar.

The consensus is that the Chinese currency will rise over the year, amid ongoing pressure from Brussels and Washington for China to resolve the unrealistically low value of the currency. Both accuse China of manipulating its currency to gain an unfair trading advantage.

This could mean some change next year, with the Chinese currency expected to rise during 2011. Just how fast it advances will be the key question – specifically whether it rises fast enough to satisfy the Americans and the Europeans.

Calls for greater currency flexibility will again register this year, but for Beijing the value of the currency is a domestic political issue and it needs to keep a rein on its currency.

China also blames US and European domestic political issues for exerting pressure on China to allow the currency to rise.

The response from the West is likely to be further trade restrictions. From its position of strength, though, Beijing is unlikely to bow to any requests from the West for a significant rise.

“The People’s Bank of China will carefully introduce currency policies which reflect both China’s real economic situation and the international role which China needs to play in this field,” Huang said.

Ye Tan does not see the yuan (renminbi) currency rising too sharply, despite the pressures from the West. “I don’t think the renminbi will become international that fast. China’s international role will not change much and the focus will be on stability,” she said.

National targets 10 highlights for domestic economy

ONE OF China's most influential periodicals Ban Yue Tan (Fortnightly Chat), which is published by the official Xinhua news agency for the propaganda department, outlined its top 10 highlights for the thriving Chinese macroeconomy in 2011.

These are interesting as they reflect how the government is thinking when it comes to the broader economy:

1. Gross domestic product (GDP) will rise about 9 per cent.

2. The consumer price index will rise in a sustainable way, between 4 and 5 per cent.

3. The focus will be on adjustment of the deficit, reducing it to between 2 and 2.5 per cent of GDP.

4. The three key rates – interest rates, exchange rates and deposit reserve rate – will change together as they did in 2010.

5. There will be reform of income distribution to increase the distribution to those of low to middle-income.

6. There will be reform in income tax and a property tax.

7. The price of the real estate market will not rise significantly in 2011 because of control methods introduced by the government.

8. Government efforts for regional development in places like Inner Mongolia and Hebei will continue.

9. The favourable balance of trade will continue to drop.

10. Strategic new industries will be developed in a fast way.