Repercussions of tightening moves moderate
By Dai Yan (China Daily)
Updated: 2004-06-10 08:45

China's economic authorities' moves to check soaring investment growth have hit a nerve in the rest of the world.

China's trade partners' concern over the steps the nation is taking is understandable given China's growing weight in the export of those countries, particularly export-led Asian economies. But how much the world should be concerned is another question.

Now the world's third-largest importer, China accounted for 32 per cent of Japan's export growth in 2003 and 36 per cent of South Korea's.

But the other side of the coin is somewhat different. China's imports accounted for only 5.3 per cent of the world's total imports last year. And it accounted for 15 per cent of the rest of Asia's exports.

Li Yushi, vice-director of the Chinese Academy of International Trade and Economic Co-operation, said the repercussions of China's control of over-investment in selected areas will be moderate - despite a likely slowdown in the growth of China's imports.

"For major trading partners, sales of basic goods to China will possibly decrease, but it will not be very serious," he said.

China's tightening measures will curb the import of raw materials and capital goods that used to be swallowed up by a few maverick industries. But they will not be blows to its major import sources in Asia as their exports are not so dependent on those elementary products. The Chinese mainland's major Asian trade partners such as South Korea, Singapore, Malaysia, Thailand, Taiwan and Hong Kong mainly sell their products to the Chinese mainland's assembly sector, which needs the imports for processing and then export.

These Asian economies would not slow down notably as long as China's overall exports go well, said Li.

Many experts point out the current overheating of China's economy is not all-pervasive as it was in 1993. The dynamic export sector and growing domestic consumption will cushion the cooling down in selected industries and still buoy China's neighbours' exports.

China's credit-tightening measures apply only to several overheated industries. The central government still encourages capital investment in the industries China needs most desperately electricity, oil and gas, transportation and water supply.

Many projects in these industries are still proceeding as planned, and they will be significant driving forces in China's economy and import growth, Li said.

Presumably, countries and regions that sell a lot of commodities and materials to China's overheated sectors are destined to feel the biggest pinch, he said.

Japan is more vulnerable than the other economies because it sells China lots of machinery, including to overheated sectors.

Other economies, such as the Philippines, Viet Nam, Indonesia, Australia and Brazil - with exposure to overheated sectors through sales of commodities - may fare less well, but China is not their most significant trading partner, Li said.

For example, even as Brazil's fastest-growing trade partner, China accounts for only 6.2 per cent of Brazil's exports, with soybeans and derivatives representing about one-third of those sales.

"Even if China slows down, it is reasonable to assume that demand would be rather against a possible drop in growth," researchers from investment bank JP Morgan said in a recent report on China-Brazil trade.

The other large components of Brazilian exports to China - iron, auto parts and steel and its derivatives - account for 40 per cent of sales. But even if all of those sales collapsed, exports would only fall by about US$1.8 billion, or 2.3 per cent, JP Morgan said.

And the control on these industries does not mean China no longer needs iron ore or steel, said Xu Hongyuan, a senior economist with the State Information Centre, a think-tank of the National Development and Reform Commission.

And after the industrial bubbles burst, imports will just be pulled back to their real level, which is still considerable, said Xu.

In 2003, China accounted for 7 per cent of global crude oil consumption, 27 per cent of the steel used in the world, 31 per cent of the coal and 40 per cent of the cement, and it replaced the United States in 2002 as the world's biggest consumer of copper.

Analysts observe that China's export sector benefits as upward pressure on production costs may subside while overheated industries cool down.

Sun Qing, an analyst from China Merchant Securities, said home electric appliances makers, which are important exporters, are unnerved by the high prices of cold-rolled steel coil, a major raw material.

Prices for cold-rolled steel coil surged to 5,701 yuan (US$689) a ton in April from 4,982 yuan (US$602) in January. It slid to 5,059 yuan (US$611) on May 31 in response to the government's move to control investment.

Prices of other steel products, rubber and cotton all surged quickly - partly because of overheated industries or wrong signals being given, Sun said.

She said that over-investment had also partly caused tight supplies of coal, electricity and oil; and tied up transportation, which had hindered exporting enterprises' ability to fulfill contracts. In some places, exporting enterprises could only operate for three days in a week because of shortages of electricity.

"Raw materials and energy are putting enormous pressures on Chinese manufacturers to raise their prices despite cut-throat competition for export markets," she said.

Tightened controls, leading to falls in those materials, was a relief to exporters, Sun said.

Higher exports and less imports might help put China's current trade balance sheet into the black, Li said.

China is already under increasing pressure to maintain its trade balance. China had a US$10.8 billion trade deficit in the first four months of this year. The deficit in February amounted to US$7.9 billion, the largest monthly deficit of all time.

Although the administration has scrapped the "the-more, the-better" line for exports, the economy was not prepared for sudden shifts to big deficits, said Li.

If a large-scale trade deficit continues, it will have unfavourable repercussions on China's international payments balance.

But Li says the surplus will not be large if export growth continues at its present rate and imports bubbles burst.

"The figure for the year will be around US$10 billion," he said.

A trade balance with a little surplus is what the government wants and would be suitable for a soft landing, Li said.

The real risk comes not from slower growth in China but from a hard landing, said Homi Kharas, chief economist for the East Asia and Pacific Region of World Bank.

"Even a 10 per cent reduction in the growth of the Chinese mainland's imports would result in a loss of less than 1 per cent of gross domestic product (GDP) in South Korea and Taiwan and less than half of 1 per cent GDP in an economy like Thailand," said Kharas.

And the loss would be offset by the larger demand of the warming world economy, especially the US economy, he said.

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