Economists Divide over China's 2002 GDP Prospect

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Last updated at: (Beijing Time) Thursday, July 11, 2002

Economists Divide over China's 2002 GDP Prospect

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Chinese economists are playing a tug-of-war over the performance of China's economy in 2002.

Optimists post their prediction of the country's gross domestic product (GDP) at around 8 percent and higher; while pessimists hold it at 7 percent, or even lower.

"Given all the encouraging signs, China's 2002 GDP should highly probably, if not 100 percent for sure, grow by over 8 and closely approach 9 percent," Song Guoqing, a famous economic analyst with the Chinese Center for Economic Research of Beijing University, was quoted as saying by the Beijing-based business weekly Securities Market.

The first index of the vibrant economic performance is the growth of the industrial added-value, Song said.

According to the National Statistics Bureau of China, the industrial added-value reversed last December its downward momentum starting since early last year and backed to 10.9 percent by April, clinching a record month-to-month growth since 1995.

Moreover, both the industrial sector and the overall economy had followed a first-up-then-down trail last year.

"Which means that the GDP growth rate in the whole 2002 will probably hit an 8 percent, as long as China can maintain a normal economic performance during the remaining time," Song said in the weekly.

Song's optimism also comes from the aggregate social demand, a total buying power created by adding up the consumption, investment and foreign trade in an economy, which chalked up 9 percent last year.

"Such a rate indicates a fairly solid aggregate social demand, completely capable of supporting a GDP growth of over 9 percent," Song was quoted as saying by the magazine.

But last year witnessed an actual GDP growth rate of 7.3 percent.

"This is because of enterprises' decreased inventory," Song argued.

"But considering the self-repletion nature of inventory investment (if low in the first phase, it will tend to bounce back naturally afterwards with the economic expectation bright up), enterprises are unlikely to slash further their inventory this year, which will in return boost the economic growth by at least one percentage point."

The generous government spending is another reason for Song's bold estimate.

As a countermeasure to a pervasive dim expectation of China's economy against a backdrop of lukewarm world economy, the central government scaled its 2002 fiscal budget up by 25.3 percent to 309 billion yuan (US$37.36 billion).

"This is a very high increase, and will forcibly push up the GDP of this year," Song said.

The warming-up world economy and the so far still bearable influence with China's entry of the World Trade Organization (WTO) to the country's economy also brace a bright expectation, according to Song.

China's imports in the first quarter did not performed a quick increase, neither will it shoot up too high during the coming months, he said.

Zhang Liqun, a research fellow of the Development Research Center under the State Council, echoed Song's opinion.

"Given their respective performance up to now, the investment, consumption and export will all perform better this year than in 2001, which will ensure a GDP growth of over 7.5 or 8 percent, if the economy could be free of any unexpected disruptions," he said in the magazine.

Similarly powerful antithesis

But skeptics appear to have in their hands sound evidences as well. They focus on the waning steam of non-fiscal investment and consumers' cooling-off buying sentiment.

Instead of solely reacting to the expansionary investment, China's economic performance is tied, on the whole, to the ups-and-downs of the social demand, especially the domestic non-governmental investment and consumption, according to Yuan Gangming, an economist with the Economics Institute under the Chinese Academy of Social Sciences.

Exports in general contribute just about 20 percent to China's overall GDP growth, with the net exports standing at an even lower level.

"Therefore, the increase of the aggregate social demand has to rely mainly on investment and consumption," the Beijing-based China Economic Times quoted Yuan as saying.

In terms of the big increase of investment during the first half year, it originates, to a great extent, in the central government's fiscal spending rather than the market spontaneity, whose sustainability is therefore questionable, he said.

In Yuan's calculation, enterprises' voluntary investment on revamping and upgrading their facilities and the other fixed assets plummeted substantially from 26.2 percent in the previous month to 3.2 percent in May.

In terms of the consumption, it seems more discouraging, according to Yuan.

The leeway for further interest rate cut is very limited, because the present interest rate is already quite low.

Moreover, when Chinese deposit their nearly 1 trillion US dollars in banks, they are tucking money away against uncertainties in education, housing, medical care and old-age pensions. In other words, they prefer not to spend their money even at a lower interest rate.

As for the controversial salary raise for government servants, it has to be tabled in fear of triggering people's complaint about its unfairness.

Some have proposed to create more and longer holidays, because they believe people usually rush to buying sprees in holidays. But such a proposal might sounds more like an expedient than a fundamental solution to prod at the dormant consumption.

"If we want to maintain a GDP growth of 7 percent, the consumption increase should be around 10 percent, a hardly reachable target in current China," Yuan said in the business newspaper.

Unfavorable external climate

Although the United Nations has predicted that the world economy will rise 1.8 percent in this year, about 0.4 percentage point higher than 2001, it does not follow, however, that the global economy has from now on ridden an upward tide, said Zhu Min, an analyst from the Economic Forecasting Department of the National Information Center of China, in the newspaper.

The United States has realized a 5.8 percent GDP growth in the first quarter, a very heartening sign.

"But the growth results, to a great extent, from the big sum of government spending and enterprises' repletion of inventory, two fragile props in the long run," Zhu said.

If excluding the government spending and the inventory repletion, the US first quarter GDP growth will drop to a lackluster 1.3 percent level, he said.

Moreover, with China's accession into the WTO, foreign firms will surely slice off more market shares as time goes by, although the first quarter still show a largely normal import level in China, according to Zhu.

As the last resort, the Chinese central government may choose to pump more fiscal money into the economy, but policy-makers have to watch out to avoid running into a fiscal bottleneck too soon.

As a matter of fact, Chinese Financial Minister Xiang Huaicheng had promised one month ago to pull up the proactive fiscal policy effective since 1998 in the foreseeable future, if not immediately.

In this case, foreign capital might serve as a substitute source of money for hyping up the domestic investment.

During the first four month of this year, foreign capital actually used by China hit more than 14 billion US dollars, up 29 percent compared with the same period last year.

In-contract foreign investment to China stood at 21.3 billion US dollars, up year-on-year only 5.1 percent, indicating a foreign capital inflow gradually steady up instead of continuously surging, according to Zhu.

"China's GDP growth is likely to touch 7 percent, but it will be a little hard for it to rise over last year's 7.3 percent," the newspaper quoted him as saying.

By PD Online staff Forest Lee

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