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21 January, 2002
Economic Update on China - January 2002
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Summary
| Review of 2001 |
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China's economy is estimated to grow by 7.3% in 2001,
a respectable growth as against global economic downturn. |
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The growth is sustained by continued strength in domestic
demand. |
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But exports weakened sharply in tandem
with the global economic downturn. There was also a weakening of investment
growth in H2. |
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CPI rose by a moderate 0.7% for the whole
year, with a softening in H2. |
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FX reserves grew by 26% with a 15% increase
in FDI, giving a firmer backing to the RMB value. |
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Stock market however suffered a plunge,
upon the uncertainties about the government's sell-off of state shares
in listed companies. |
| Outlook for 2002 |
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External environment will remain unfavorable with continued
weakness of global economy for 2002 as a whole. |
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Domestic demand calls for a further boost to offset
the adverse impacts of the global economic weakness and also the negative
impacts of various reforms on short-term growth, as against the 7%
GDP growth target. |
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In response, the Chinese government is expected to
adopt a more expansionary policy stance in 2000, with a more proactive
infrastructure program, another salary increase for civil servants,
a cut in RMB interest rates, and tax concessions. |
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GDP growth is forecast to be 7.1% in 2002, with 6.7%
and 7.4% for H1 and H2 respectively. |
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Inflation should return to uptrend but will remain
modest. |
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Stock market is expected to show a gradual rebound,
but would continue to undergo an adjustment process during the bulk
of 2002. |
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Neither depreciation nor appreciation of the RMB value
is anticipated for 2002. |
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WTO opening-up is set to formally kick off shortly.
But the impacts, either positive or negative, are not likely to be
significant in short term. |
| 1. |
Review of 2001 |
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| a) |
A respectable 7.3% growth with continued strength
in domestic demand, while with a "high in H1, low in H2"
pattern |
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China's economy is estimated to grow by
7.3% in 2001, which is slower than 2000's 8% but is a very respectable
growth as compared with the growth numbers for most of the other economies
inflicted by a sharp global economic slowdown. |
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Both domestic consumption and investment
maintained a strong growth, with retail sales and fixed assets investment
growing by 9.9% and 11.5% (estimate) in 2001 respectively. Government
policies played an important leveraging role in achieving the growth,
particularly for investment. A 30% salary increase for civil servants,
which was followed by many enterprises, helped strengthen the momentum
of urban consumption. Some policies to raise rural income have also
been put out, while the effects are yet to be seen. The role of the
government's proactive infrastructure program with RMB150 bn worth
of bond issues in sustaining the 11.5% investment growth is more pronounced. |
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Export growth however slowed to 6.8% in
2001, in tandem with the global economic slowdown. In fact this is
a decent export growth as against the severity of global slowdown
and as compared with the numbers for other countries. But it represents
a significant export slowdown for China as compared to the 28% export
growth achieved in 2000. |
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Noticeably economic growth in 2001 exhibited a "high
in H1, low in H2" pattern. |
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The economy continued 2000's momentum with
a 7.9% GDP growth in H1, with strengthened domestic demand while slowed
export growth. But the growth weakened in H2, to 7% in Q3 and 6.5%
in Q4, owing to a slowdown in investment and a further decline in
export growth. |
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Investment growth slowed to below 10% in H2 and 7%
in Q4, largely due to the diminishing of the government project funds
when it approached year-end. This suggests that spontaneous investment
by enterprises, either state or non-state, is still not strong enough.
Accelerated global slowdown in H2, especially after the September
11 tragedy, also dampened the investment sentiment. |
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Meanwhile export slowdown accelerated to 4% in Q3.
But somewhat surprisingly, there was a recovery in exports with a
quite decent 6% growth in Q4 despite the September 11 tragedy. It
shows again the resilience of China's export competitiveness, while
being partly due to base effects. Nevertheless, for H2 2001 as a whole,
export growth weakened further to 5%. |
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| b) |
Inflation also exhibited a "high in H1, low
in H2" pattern, while RMB interest rates kept unchanged |
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CPI inflation rose by 0.7% for 2001 as a whole, but
exhibited a similar pattern to GDP growth with an uptrend in H1 while
a downtrend in H2. Particularly it fell back into negative territory
in Q4, re-arousing deflation concerns. |
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While the staggering of inflation reflects excess supply
situation in China markets with over-capacity in many industries remaining
serious, the CPI downtrend in H2 is a result of both the importation
of the worsening of global deflation and the weakening of market demand. |
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Particularly the sharp fall in the prices of oil, steel
and other raw materials products in international markets had a serious
negative impact on raw materials prices in China markets, which in
turn hit the final product prices with cost-dragging effects. |
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With weakened inflation, the prospect of a RMB interest
rates increase expected in mid-2001 diminished in Q4 2001, and in
effect has turned into the prospect of a RMB rates cut recently. |
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| c) |
FX reserves rose by 26%, giving a firmer backing
to RMB |
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Due to simultaneous slowdown for exports and imports,
trade surplus was only reduced by 6.8%, and remained sizable at USD22.5
bn, in 2001. Meanwhile FDI recorded USD47 bn, 14.9% up from 2000. |
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As a result, the country's foreign exchange reserves
hit RMB208 bn at end-2001, growing by 25.6%. |
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This has given a firmer backing to the RMB value. In
fact the market concerns about the RMB had changed from worrying about
devaluation to speculating on appreciation in the bulk of 2001 until
the Japanese Yen embarked on a sharp falling trend again late last
year. |
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| d) |
Stock market however suffered a plunge |
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There was a plunge in China's stock market by over 30%
in H2 2001, with two waves of panic stock selling by public during
July-Aug. and Nov.-Dec. respectively. |
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The major reason for the plunge is the uncertainties
on the government's sell-off of state shares in listed companies.
Investors are puzzled by the changing and confusing comments by the
government on the speed, volume and prices, etc., of the sell-off. |
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From the government point of view, the sell-off is necessary
for raising funds for the country's social security system, while
it is also imperative to bring down the high PE ratios for China's
listed companies. But they have underestimated the reaction of public
investors to the uncertainties. |
| 2. |
Outlook for 2002 |
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| a) |
External environment will remain unfavorable for
2002 as a whole |
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Market consensus expects global economy
to recover in H2 2002. H1 is likely to continue to see tough times,
while the recovery is H2, if any, is not likely to be strong. Hence
global economy is set to show another year of dismay for 2002 as a
whole. |
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Given such a global outlook, China's export
prospect is not likely to have a real improvement in 2002. More importantly,
global deflation with further declines in the prices of oil, steel
and other products in international markets would continue to exert
deflationary pressure on China markets. |
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| b) |
Domestic demand calls for a further boost
as against the 7% growth target |
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China's potential economic growth rate at the present
stage should be above 7% from a development stage viewpoint, as argued
before. But various factors, external or domestic, would make the
spontaneous growth to be below the potential growth. The most important
among others, in addition to global economic performance, are the
short-term implications of various reforms for economic growth. |
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While reforms are vital to China's long-term sustainable
economic growth, different reforms would however have different implications
for short-term growth with different impacts on consumption and investment. |
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On consumption, SOE reform gives rise to a lot of uncertainties
for urban consumer by creating unemployment and higher savings requirements,
while rural reforms are lagged behind resulting in rural income and
consumption remaining weak. |
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On investment, banking reform has made banks reluctant
to lend and SOE reform made SOEs more cautious to borrow, which has
weakened investment demand by SOEs, while slower-than-expected progress
in emancipating the private sector is attributable to slower-than-expected
private enterprises growth and in turn slower-than-expected non-state
investment growth. |
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These will be added by the impacts of WTO entry and
stock market reform from this year. WTO entry and stock market reform
are undoubtedly of profound significance to China's long-term development
and reforms, and the latter will also be conducive to short-term growth
by boosting exports and FDI. But their negative impacts on domestic
investment, consumption and prices as well as SOEs in short term will
also be significant. |
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Therefore while there is no lack of driving forces for
domestic demand in medium & long term, there is need for a further
boost of domestic demand to offset the negative impacts of various
reforms as well as the adverse impacts of the global economic weakness
on short-term growth, as against the government's 7% growth target,
under the current circumstances. |
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| c) |
More expansionary monetary and fiscal policies |
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Given the above, the Chinese government is expected
to adopt a more expansionary stance for monetary and fiscal policies
in 2002. |
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More proactive infrastructure program --- The
government's proactive infrastructure investment is expected to accelerate
in 2002, with more bond issues financing the infrastructure projects.
The bond issues will likely reach RMB200 bn this year as compared
to last year's RMB150 bn. |
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Another salary increase --- There will likely
be another salary increase for civil servants this year given the
government target of doubling the salary in 3-5 years announced in
2000. But the increase is unlikely to be as high as the 30% in 2001. |
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A RMB rates cut --- A cut in RMB interest rates
has become a realistic issue, and the move is likely to be made by
the PBOC at or shortly after the National Conference on Finance Work
scheduled for early February. But the room for cutting the deposit
rates is not big given current rates being already low. Hence the
effects on consumption are not likely to be substantial. The cut of
lending rates is expected to be larger, and in turn the impacts on
enterprises to be more pronounced. Overall, the impacts of the RMB
rates cut are expected to be moderate. |
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Tax concessions --- It is also likely that the
government will make tax concessions in a bid to stimulate business
activities as well as help the profitability of enterprises. The government
has made great efforts to raise the proportion of government revenue
in GDP in past 5 years. As a result, government revenue has largely
outgrown economic growth, and its proportion in GDP has increased
6 percentage points in the 5 years. This gives the room for the government
to reverse the policy temporarily. |
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| d) |
GDP growth is forecast to be 7.1% in 2002, but with
a "low in H1, high in H2" pattern |
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Export growth is expected to remain weak at about 5.5%
in 2002 given the unfavorable global economic outlook, despite an
expected positive impact on exports from WTO entry. Import growth
is likely to be higher given that domestic demand will remain strong
while many tariffs will be cut as required by WTO entry, but by less
than 3 percentage points as over half of China's exports are engaged
in processing trade. Trade surplus is therefore expected to decline
by USD1.4 bn or 6% in 2002. |
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Consumption is likely to be a bit weaker in 2002 than
in 2001. The negative impacts of the plunge of stock market started
in H2 2001 are likely to emerge more strongly in 2002, while salary
increase is expected to be more moderate than in 2001. Meanwhile rural
consumption is not likely to have a substantial improvement as effective
policies for raising rural income are yet to be seen. The RMB rates
cut will not help much consumption as said earlier. Nevertheless,
urban consumption, and in turn total consumption, will maintain a
strong growth in 2002. |
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With the more proactive fiscal policy as well as the
lending rates cut, state investment growth is likely to sustain last
year's momentum. Non-state investment is not likely to accelerate
strongly, but would continue with a slow improvement. Meanwhile FDI
inflows are expected to accelerate as WTO opening-up kicks off. Therefore
total investment growth in 2002 is expected to be largely in line
with that in 2001. |
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Against this background, GDP growth in 2002 is expected
to be 7.1%, slightly slower than that of 2001. |
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But there would be an opposite growth pattern in 2002
to that of 2001, with a lower growth in H1 and higher growth in H2.
Export growth is likely to continue to slow down in H1 2002 but should
rebound in H2 2002 in tandem with expected growth pattern of global
economy. Meanwhile, investment growth would be weak in Q1 and in the
bulk of Q2 while it is likely to accelerate in H2 as the government
bonds can only be put in place after their issuance is approved by
the NPC Annual Session scheduled for March. |
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Therefore we expect to see a 6.7% in H1 and a 7.4% in
H2 for the GDP growth in 2002. |
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| e) |
Inflation should return to uptrend but will remain
moderate |
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While it is likely to remain in negative territory in
the first several months, CPI inflation should return to positive
territory for 2001 as a whole, if global economy recovers and hence
global deflation improves and also domestic investment picks up in
H2 as expected. |
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But a strong rebound of inflation is not anticipated
in 2002 and even in the coming 2-3 years, as widespread over-capacity
in many industries is unlikely to be absorbed in short term. |
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| f) |
Stock market is expected to show a gradual rebound,
but would continue to undergo an adjustment process |
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Having realized the seriousness of the impacts of the
plunge of the stock market, the CSRC (China Securities Regulatory
Commission) has recently announced a new proposal regarding the sell-off
of state shares, which is generally more in favor of investors. |
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With the details of the proposal expected to be released
in coming months, the uncertainties about the sell-off should diminish
gradually, which is expected to result in a gradual rebound of the
stock market. |
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But as the sell-off of state shares is set to go ahead
being considered an effective way to raise funds for the country's
social security system and also a way to bring down high PE ratios,
the rebound is not likely to be rapid and robust. China's stock market
would continue to undergo an adjustment process in the bulk of 2002. |
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| g) |
Neither depreciation nor appreciation for the RMB |
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Like in previous years, given expected accelerating
FDI inflows and still sizable, albeit reduced, trade surplus, there
will continue to be virtually no devaluation pressure for the RMB. |
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The concern that had Japanese Yen depreciated to 145-150
against USD, then the Chinese government would devalue the RMB to
defend China's export competitiveness, is justified. But it is more
likely that the Chinese government as well as other Asian governments
will voice their concerns and even protests before the Yen devalues
to that low level and the Japanese government will have to take them
seriously, which would prevent the scenario from taking place. |
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Under such circumstances, the Chinese government will
not likely allow the RMB to appreciate either, despite the appreciation
pressure from the balance of payments sheet. |
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| h) |
WTO opening-up is set to formally kick off, but the
impacts, either positive or negative, are not likely to be significant
in short term |
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A large number of laws, regulations and rules have been
amended to make them in line with the WTO requirements, and even some
concessions committed in WTO agreements have already been made, in
the past two years. Now that China has formally joined WTO, the historical
opening-up of China's markets as committed for WTO entry is set to
formally kick off from early this year. |
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Both positive and negative impacts of the entry, as
addressed in our previous write-ups, are expected to emerge shortly.
But one should bear in mind that there is set to be various kinds
of resistance to the implementation of the WTO concessions, and overcoming
such resistance and enforcing the implementation will take time, while
the significance of the WTO entry for China is a long-term one. Hence
the impacts of the WTO entry, either positive or negative, are not
likely to be significant in short term. |
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| Liao Qun |
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