International | Jul 03 2006
A lot has changed in China over the past two years, and HSBC chief economist John Edwards now says there is no doubting the robustness of the country’s economic expansion.
Edwards was in China last week to see for himself first hand that while the economic data may not be all that different to 2004, "the mood among Beijing policy makers today sharply contrasts with the mood two years ago."
Back then they were losing sleep over the rapid pace of investment in real estate, cars, cement and steel, as well as the speedy rise in output growth, particularly due to the fact that much of this investment was by state-owned companies and financed by state-owned banks. In addition, there were concerns over the lack of flexibility in the exchange rate, Edwards says, as well as the leadership’s "reluctance to open up the capital account," both of which would have allowed interest rate changes to influence growth.
Now the situation is (slightly) different, Edwards observes. Over the past two or three years investment growth has slowed from 40% to 30%, although this is clearly still high. The currency is more flexible, but only just and actual movement is slight, and official interest rates are up, but only by a bit, he says.
GDP growth is still at the same levels as in 2004, around 10%, while the current account surplus has doubled and private businesses are contributing more, he adds, and state owned companies and banks are doing more or less the same.
Although the economic climate is only marginally different, one Chinese policy adviser has described it as a "successful soft landing," which Edwards says in a strange sort of way it is.
What has changed drastically, he says, is the evaluations being made by foreign analysts. Edwards points to a World Bank report that "suggests there is little evidence of over capacity in Chinese industry," a point backed up by a CLSA manufacturing conditions analysis which highlights evidence of capacity pressures in the manufacturing sector.
The latest World Bank quarterly update on the country mentions no concerns about investment from state-owned companies and points to the expectation of sustained rapid growth for the next several years, Edwards says.
Things have changed so much that the World Bank is now against a slowdown in credit growth, HSBC points out, as well as being anti measures to slowdown investment as it does not feel they are justified by over-capacity or inflation. These kind of measures would now just increase the trade surplus, as they would restrict imports, Edwards states, and encourage exports, further aggravating countries that are already concerned by trade imbalances.
While some concerns still remain, such as the risk of high levels of bank liquidity, Edwards argues that a risk is not the same as a problem, and points out that the only real difference in view between what China is putting into practise and what the IMF and the World Bank are recommending is basically a question of pace.
By Terry Hughes
