China's economy is not overheated
By Thomas Chan Man Hung (China Daily)
Updated: 2004-05-31 14:38

In a conventional sense, China's economy is not overheated.

China had a low inflation rate, averaged at 2.8 per cent, in the first quarter of this year. It will probably be at or below 4 per cent for the second quarter.

The country still has a huge problem of underemployment for its 800 million farmers. The unemployment rate in cities is also increasing.

All these trends suggest China's economy is nowhere near overheating on the basis of conventional standards.

Although the inflation rate might rise above 4 per cent in the second quarter and reach its peak in the third quarter, the following factors are worth mentioning.

The food price increase since last September resulted from a poor harvest last year. Given the bumper harvests in past years and the reported huge reserve in State warehouses, poor harvests for a single year should not be able to push up grain prices by a margin as big as 30 per cent. So the food price increases have been abnormal.

In the fourth quarter of last year, 85 per cent of the rise in the residents' consumption price index - at 2.7 per cent - came from food items. In the first quarter of this year, the ratio was even higher, at 86 per cent. If the government has the food grain reserves, as were recorded, there should not have been such a rise in inflation.

In the coming autumn, with bumper harvests in sight, food prices would likely fall in the third quarter. Already vegetable supplies have become very abundant so that prices have been falling lately.

As prices of consumer goods continue to fall, economic overheating in the non-agricultural sectors hardly exists. Despite the steep price hikes for raw materials and energy, oversupply and intensive competition in the consumer goods market as well as in markets of other finished products should be strong enough to suppress the demand for raw materials and energy.

Electricity shortages and regular brownouts in a majority of provinces and cities have also served as a brake on investment and production activities in recent months.

The recent liberalization of China's current account and the availability of abundant hard currencies have raised imports to make up for the domestic market shortage.

On the other hand, electricity shortages are not fully an indication of economic overheating, but rather an outcome of miscalculation and administrative intervention by the government, which stopped construction of power plants in the last three years without any consideration of the changed circumstances.

Since 2002, there has been a great deal of investment and a production drive in China, boosted by confidence in the country with its WTO membership. There might have been overlapping and wasteful investment projects. But under present market forces, most of the projects are stimulated by changed market conditions and profit motives. Cyclical changes in market conditions may weed out later some of the less efficient projects, which is quite normal for most market economies.

Given the vast size of China, the almost unlimited supplies of labour and consumption demand, China's growing role as the world factory and world's major market, a GDP growth rate of 10 per cent or more is just normal.

It is true that the Chinese Government should pay more attention to ecological balance and environmental preservation. But these have already been governed by legislation and what the central government should do is probably better enforce (and improve) the existing legislation and regulations, not to interfere with the market.

These are policy implementation problems or political problems, not economic difficulties, and they should be resolved by political means, not by economic means.

There are also needs to address the issues of income inequalities and regional disparities. Without urbanization and industrialization, it might be difficult to modernize the agricultural and rural sectors of China mainly by financial transfers, redistribution of resources from the more developed coastal cities and industries. Even for financial transfers the government needs a higher growth rate to generate revenues for such a purpose.

The crucial issue for China now is not economic overheating, but a proper assessment of the economic growth dynamism under a historic global relocation of production capabilities and consumption demand.

The government should learn from the mistakes of stopping construction of power plants for three years, and should also be aware that the global relocation may be completed in the next two or three years, beyond which China may need to find a way to maintain the high growth generated by the relocation or face the coming of a cyclical downturn.

The latter does not give a good excuse for the government to suppress the present growth, but instead it should use the revenues and available capital from the present high growth to expand domestic demand and transform its economic structure into one of higher productivity and better sustainability.

Except for a limited number of projects of local governments or private enterprises that violate State regulations, which can be corrected easily, the present production and investment drive seems to be in the right direction. It is transforming the Chinese economy and preparing it for the more sophisticated growth regime of the future.

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