If China’s fourth quarter economic growth slows to under 9%, current economic policies, characterized by slight adjustments, may also see some changes and China will be looking at spending big money in support of areas deemed vital to its still modernizing economy.
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9% Growth May Trigger Radical Policy Rethink
In Beijing, while the debate rages over whether the government should launch a large-scale economic stimulation plan now that the Beijing Olympics have finished, there is no debate over whether China’s economy is undergoing a sea change. The “high growth, low inflation” of the past five years is gone, says Zhu Baoliang, chief economist of the Economic Prediction Department of the State Information Center. Industries that have been the economy’s pillars are showing weakness there are questions where future growth will come from.
If China’s fourth quarter economic growth slows to under 9%, current economic policies, characterized by slight adjustments, may also see some changes and China will be looking at spending big money in support of areas deemed vital to its still modernizing economy.
Surplus Production Capacity
High export demand and low labor costs, both supports for China’s economy in the past several years, are gradually vanishing. Other factors are changing, also.
In the past five years, the real estate and automobile industries have lead domestic consumption and settled in as two key industries promoting China’s economic growth. Real estate investment accounted for about 22% of total fixed asset investment in urban areas, making the industry a significant part of China’s economy.
In July this year, although real estate investment growth still reached as high as 30.9%, both sales amount and sales price have decreased.
And now carmakers are suffering aftereffects from over-expansion.
Zhu Baoliang says that high oil prices and the slump of the stock market have reduced demand for cars priced between 50,000 and 200,000 yuan, and more than 200,000 yuan. Some large automakers in Guangdong, including Toyota, can no longer maintain their “zero stock” sales model. With overstocking, the auto industry is suffering production capacity surplus.
Although overall supply surplus across the economy has been reduced since the beginning of the year, it hasn’t vanished. According to the Ministry of Commerce, of over 600 major consumption goods and 300 major raw materials, 101 products, mainly manufactured consumer products such as household appliances, sports and entertainment products, hardware, tools, shoes and hats, are in surplus, as well as 52 raw materials used mainly in the automobile, machine and construction industries.
If industrial production snaps back after the Olympics, overstocking will become serious by the end of the year. Growing costs and declining demand will see companies’ profits decrease further.
Decreasing Demand Spreads
Production surpluses are spreading both upstream and downstream. The steel industry, closely connected to both the automobile and real estate industries, is the first to be affected.
Domestic steel prices have dropped steadily for straight seven weeks. Yang Siming, general manager of Nanjing Iron & Steel Union Co., Ltd., says the company has already reduced its production. Upstream, the Union of Coking Enterprises of Shanxi Province has reduced coke prices for September by 5%, and reduced coke production for this month by 40% to 50%, to cope with the demand decline and the steel market downturn.
In consumption, the slow growth of incomes cannot support the formerly rapid growth of the car and real estate markets. The reported 6.3% increase in per capita disposable income of urban residents of the first six months can longer maintain the 20% consumption growth of 2007.
China has long sought to ease companies’ operational difficulties through economic development, but this becomes harder due to economic downturn and shrinking external demand.
The State Information Center calculates that a 1% decline in GDP growth will lead to a 9% drop in company profits. If the economic growth slows much further, companies can expect losses.
Fighting Inflation but Boosting Growth
Shrinking demand is coupling with inflationary pressure. The government needs to maintain stable grain prices, at the same time reducing inflation, and launch resource price reforms. Since it has to reach a balance between commodity and resource prices, inflation is unlikely to fall back short-term.
Zhu Baoliang says the US, to cope with growing inflation and stalling demand during President Reagan’s time, maintained tight monetary policies, cut taxes and deregulated industries, and China is following similar policies. One difference is that since China is spending a large part of its revenue on improving people’s livelihoods, a large scale tax cut doesn’t seem feasible.
Zhu Baoliang said now the financial revenue should be spent on five areas: Agriculture, R&D, energy conservation and emissions reduction, improving livelihoods, and supporting small and medium-sized enterprises. And since China’s economy will continue to need support from the real estate industry for the next 20 years, the government can also invest revenue in the construction of low-cost housing.
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