Published on January 31, 2005

The outlook for the Chinese economy remains bright, but great risks lurk ahead, China experts warned yesterday.

“The movement of the US dollar is a key question for the Chinese economy. If the US dollar bottoms out, probably this year, and later starts to rise up quickly, then it would be big trouble for China,” said Andy Xie, Morgan Stanley’s chief economist for Asia.

If the dollar sinks and then slowly recovers, then high growth in China will continue, he said.

Although the United States and other countries have insisted that China revalue its yuan, currently pegged at 8.28 to the US dollar, the Chinese government should deal with financial reform before moving on to exchange-rate reform, he said.

It would take many years and great effort to clean up the Chinese financial industry, which is saddled with huge bad debts, Xie told the Fiscal Policy Office’s forum held last week for executives called “Unlocking the Dragon’s Gate”.

For the time maintaining a fixed exchange rate is essential for economic stability, he said.

If the exchange rate is adjusted first, it could lead to erosion of confidence in the local currency when the US economy rebounds. Capital would flee China, sparking an economic crisis.

Now the economy is overheated and at risk of bursting, in particular the real-estate industry, due to speculators betting on a stronger yuan.

“Shanghai is like a casino, as investors have bought apartments which are empty now,” Andy said.

Export growth is strong, but it is exaggerated, because exporters bring in money for speculative purposes, including buying stocks.

A significant portion of official foreign reserves, currently worth US$610 billion (Bt23.5 trillion), is hot money, which poses a threat to economic stability.

Chinese authorities need to raise interest rates in order to deflate the bubble and cool the speculative fever. They have plenty of room to raise rates because rates now are much lower than those in the US.

Growth in China is a myth, he went on. It is a deflationary model, where wages remain low, prices of goods are kept down due to high competition, return on investment is slim, and investment is financed by debt.

The system works because of the state’s ownership of the financial system, which prevents capital from drying up. Workers are willing to accept low wages, and liquidity keeps coming from growth in exports. A crisis will arise when liquidity dries up, which occurs when exports experience a protracted downturn.

Exports grew 35.4 per cent last year, and imports rose by 36 per cent. Chinese international trade accounts for 10 per cent of world trade.

“As long as US consumers keep spending, economic growth in China will last,” Xie said. Economic growth will remain strong for a decade but will be subject to very cyclical volatility.

Other outstanding catalysts of the Chinese economy are high household savings and rapid improvement in productivity, Xie added.

Yoshinori Shimizu, an economist at Japan’s Hitotsubashi University, sees China’s economy expanding 7-8 per cent for the next 10-15 years, albeit at a slower pace than last year’s 9.5 per cent.

Pongpanu Svetarundra, deputy director-general of the Fiscal Policy Office, did not agree with Xie’s assessment of China’s exchange-rate regime, arguing that China was going to revalue its currency due to extreme pressure from trade partners, in particular from the US, which was trying to address its twin deficits by using a weak dollar as a tool.

Experts said growth constraints included higher oil prices, meagre water resources, severe pollution and a worsening income gap between people in coastal areas and inland.

Wichit Chaitrong

The Nation

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