International | May 25 2006
By Chris Shaw (Tokyo)
Following another quarter of strong growth figures, the Bank of Finland has completed an assessment of the Chinese economy, identifying some emerging and ongoing trends and outlining what it sees as the most likely policy objectives of the Chinese government over the course of the year.
In terms of investment, the bank takes the view the structure of investment spending is finally showing some signs of improvement, as it notes the widespread controls put in place in industries such as smelting have produced some investment restraint, while needy areas such as infrastructure and service sectors are showing signs of increasing.
Further measures are likely to limit the amount of investment in other sectors though, the bank noting the government is likely to attempt to reduce overcapacity in sectors such as cement, coal and aluminium, as well as increasing the restrictions on property investment generally and the speculative end of the market in particular.
One problem with this approach as the bank notes is if the restrictions go too far and the property sectors slows significantly, this could flow through into other sectors and have negative implications for growth generally.
The other issue that continues to be problematic in the bank’s view is the ongoing high personal savings rate, as this adds fuel to the investment boom while limiting the growth in personal consumption. This lack of domestic demand is not helping the central bank’s attempts to rebalance the economy away from exports and investment, while also making it difficult to address the imbalance in wealth between the rural and urban sectors.
In terms of policy going forward the Bank of Finland’s view is fiscal policy is unlikely to change significantly this year, though there will be a renewed focus on improving the distribution of spending on economic development.
Measures such as the recent increase in interest rates and the relaxation of allowances on the amount of money that can be taken out of the country are unlikely to be the last such changes introduced. In the Bank of Finland’s view, further work needs to be done to reduce the excess liquidity in the banking system, which in combination with loose lending policies has allowed credit growth to accelerate to levels that may not be sustainable.
One area where the bank suggests the Chinese growth is lagging is in total factor productivity, which is a measure of technological development. This measure matters in developing countries as the bank notes it is easy for them to import technology as they grow, giving the impression their level of development is speeding up. Recent studies suggest the technology growth trend in China has been slowing in recent years, which to the bank indicates the current rate of economic growth will prove to be unsustainable in the longer-term.
