China looking to wind down annual GDP rate
By Siva Yam and Paul Nash
Updated: 2004-05-26 09:24

The annual growth rate of China's economy is highly predictable --during the five years from 1998 to 2002 it has been somewhere between 7 per cent and 8 per cent, and China's central government has set a long-term annual target of 7.2 per cent.

In 2003, China's economy grew by 9.1 per cent, and the first quarter of this year saw another 9.7-per-cent growth.

This growth has proven to be much more robust than the Chinese Government had anticipated or planned for.

For this reason, we believe that the Chinese Government will take measures to slow down the economy to more manageable levels, endeavouring to bring it in line with its longer-term target, partly in order to avoid the potential social instability that such rapid growth may cause.

China, a market-oriented economy with "Chinese characteristics," finds itself in a much stronger position than most other countries to manage its economic grow.

It possesses huge foreign currency reserves, a large inventory of infrastructure projects, a number of monopolistic "pillar" corporations that are State-owned, including the Big Four Banks, and no private land ownership.

We believe that the real estate sector will be the first and focal point in this process of economic management.

Many economies around the globe rise and fall with their real estate markets. This is particularly true in Asia, where so many billionaires have made their fortunes in real estate development.

In a country such as China, where the real estate market, particularly the residential property market, is driven by speculators, real estate development offers an ideal tool for fine-tuning economic growth.

The Chinese Government could fine-tune the rate of economic growth by limiting real estate lending, by restricting the ability of developers to presell condominium projects based on only their construction plans or blueprints, and by granting less land to developers at low or even no cost.

Even before the Chinese Government's recent pronouncements, major cities such as Shanghai, Beijing, Guangzhou and Shenzhen have suffered from overdeveloped real estate markets.

The Chinese Government's efforts to slow the economy will no doubt exert further strain on property developers.

The resulting decline in real estate valuations, in our opinion, will have little negative impact on ordinary Chinese citizens. Many condominiums, after all, remain unoccupied.

In fact, a decline in real estate valuations should help to render private ownership of housing more affordable in China and alleviate potential social instability.

Within the coming few years, we anticipate that some semifinished buildings will come up for sale, buildings with completed exteriors but unfinished interiors.

While China's efforts to slow its economy will have a negative impact on the world's economy at large, the effects will certainly spill over into South Korea, Japan and China's Hong Kong Special Administrative Region and Taiwan Province, in particular, they should lift some pressure off the supply chain.

Steel prices, for example, which have spiked sharply in recent moths, will ease up as less construction in China reduces demand.

The prices of other raw materials such as cement and aluminium, as well as electricity in China, will likewise come down to more reasonable levels and reduce inflationary pressures.

Excess capacity in many industries, coupled with excess labour in many parts of the world, will certainly present new challenges.

Manufacturers in both China and the United States will face even more intensified competition.

These challenges will be complicated further by rising oil and energy prices.

Nevertheless, inflation should remain under control in most sectors, and manufacturers in all parts of the world will no doubt have to scramble to find enough business to keep their factories running.

Siva Yam, president of the US-China Chamber of Commerce. Paul Nash, editor of the US-China Chamber of Commerce.

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