International | May 26 2006
By Chris Shaw (Tokyo)
With GDP growth in China stronger than expected in the March quarter the World Bank has revised its growth outlook, while also attempting to assess whether the growth performance is positive for the longer-term health of the economy.
The bank has also offered some suggestions for the policy actions it considers most appropriate as the Chinese attempt to maintain solid growth while addressing the current imbalances in the Chinese economy.
The bank now anticipates growth for the full year of 9.5%, which would be a slowdown from the 10.2% seen in the three months to March. It suggests such an outcome is likely as there are signs domestic demand is slowing at the same time as slower credit and profit growth point to a slowdown in investment.
Offsetting this was strength in exports, which the bank notes is being driven by the continual development of new products. This has the effect of limiting the impact of competition from other nations such as Vietman that actually have a cost advantage over the Chinese.
In the bank’s view, the outlook remains favourable from a macroeconomic perspective as a softening in growth will allow the government to focus more on addressing the structural imbalances that remain in the economy.
This is where the situation becomes more complicated though, as the bank suggests there is a contradiction in the People’s Bank of China policy of allowing liquidity to remain high while attempting to rebalance the economy by increasing consumption.
As the World Bank notes, the high levels of liquidity in the banking system encourage growth in credit, but the attempts to restrict the level of investment in riskier sections of the economy are proving insufficient.
As an example, it points out the financing of real estate purchases is being done less by deposits and advance payments and more by bank credit, which could potentially cause problems in the future given the timing mismatch in terms of loan maturities. Additionally, the banking system could come under pressure as it has less ways to limit risk thanks to the lack of specialist instruments such as mortgage-backed loans and refinance markets.
Measures introduced by the People’s Bank such as the recent increase in official interest rates are only short-term solutions, the World Bank view being these underlying issues are structural in nature and therefore require greater policy adjustment.
One effective adjustment in its view would be to allow for a more rapid appreciation in the value of the currency, as this would play a significant role in addressing the structural imbalances.
It suggests changes in the exchange rate would help address the trade surplus while also reducing the inflow of direct and non-direct foreign investment, as it would make it less attractive for foreigners to invest money in China. The recent relaxation of rules regarding the ability of Chinese companies and individuals to move money offshore is also a step in the right direction, as it should help free up funds previously locked in.
A change in the exchange rate would also shift the growth focus onto domestic consumption rather than investment and exports, as imports would become cheaper and so may encourage people to go out and spend rather than save.
The final area of adjustment seen as necessary by the World Bank is for government spending to shift further towards sectors such as health, education and the social safety net while removing many of the subsidies that exist in a number of industries, as this would lead to an increase in the level of investment in services rather than manufacturing.
The flows of money would then be less to sectors with overcapacity such as steel and cement and more to areas of need such as those mentioned and infrastructure, which would also help reduce the potential for social unrest from the perceived (and real) discrepancy between the rural and urban regions.
