Opinion: Overheating economy a false alarm

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Last updated at: (Beijing Time) Tuesday, September 16, 2003

Opinion: Overheating economy a false alarm

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Some scholars and officials, from both home and abroad, put forward the view in the first half of this year that China's economy is showing signs of overheating, urging the government to implement austerity measures to prevent inflation.

They drew the conclusion from the country's GDP growth rate, expanding investment and loan supply as well as climbing real estate prices.

I do not agree with such a point of view. Employment and consumption in the nation would suffer greatly if macroeconomic policies were drawn on the basis of such a premise.

A primary indicator for an overheating economy is the huge pressure for price increases. For the time being and in the near future, there is no source for such a pressure.

In July, the consumer price index (CPI) increased 0.5 per cent compared to the same period last year, but declined by 0.5 per cent over June. For the first seven months on the whole, the CPI edged up just 0.6 per cent.

The prices of industrial products increased during the first quarter. But the growth rate began to slow down from April. In July, the growth rate was only 1.4 per cent compared with the over 4 per cent growth in March.

The average salary of employees increased by 11.6 per cent in the first half of the year. But 1.24 million employees of State-owned companies and 400,000 from collective enterprises lost their jobs during the same period.

Farmers' income is expected to increase by only 4 per cent this year. Around 8 million rural migrant workers returned home, due to the SARS outbreak, contributing to farmers' reduced income.

For the first six months, the gross retail sales of consumption goods increased by 8 per cent compared to the same period last year. The normal growth rate is thought to be around 13 per cent.

In terms of income, consumption and prices, there is no sign of a pressure for price hikes and any subsequent overheating of the economy.

The unemployment rate is another benchmark to judge whether an economy is overheating or not. A rising unemployment rate suggests that the opposite of overheating is actually taking place in the economy.

This year there is a total of 33 million labourers who need jobs, including 8 million urban labourers, 8 million redundant rural labourers coming to cities to find work, 5 million jobless urban employees seeking re-employment and 12 million people who were also unemployed last year.

If only 8 million jobs could be created this year, the unemployment rate would exceed 9 per cent. Even if the 8 million transient farmer workers were not accounted for, the unemployment rate would still rise to as high as 6 per cent by the end of this year.

An overheating economy is characterized by strong demand for labourers due to mushrooming new projects, which could even lead to that the demand for labourers exceeds the supply. The current employment situation apparently does not fit that of an overheating economy.

The expanding loan supply at present is a measure taken by banking system to narrow the huge gap between credits and deposits which resulted from a tighter monetary policy in recent years.

Financial institutions preferred to deposit savings into higher level institutions, or bought State treasury bonds, and were reluctant to grant loans to enterprises.

The ratio between loans and deposits, which stood at 113.3 per cent in 1993, was on a curve of decline since that year. By 1996, the deposits outnumbered loans. And in 2002, the ratio plunged to 76.8 per cent, which represented an imbalance of loans to deposits of 3 trillion yuan (US$361 billion).

By July, the outstanding deposits of the banking system were 20.79 trillion yuan (US$2.5 billion), while the outstanding loans were 16 trillion yuan (US$1.93 billion), representing an imbalance of 4.79 trillion yuan (US$577.1 billion).

The trend was reversed from the beginning of this year because of reduced deposit rates in higher-level institutions and declined State treasury bonds eligible for banks.

In the first seven months, though loan supply was increased by 995.3 billion yuan (US$119.92 billion) over the same period of last year, it does not point to an overheating economy.

In a macroeconomic analysis, some scholars hold that the increase of M1, or the narrower monetary supply, and M2, or the broad monetary supply, means an increase of monetary supply on the whole, which is bound to lead to an economic overheating.

In any practical economic operation, however, M1 and M2 represent only potential demand, and could become effective demand only when they are turned into loans.

The current and time deposits in banks would not contribute to enlarging investment if they were not transferred into loans.

It is a theoretically dangerous thing to predict inflation based on the increased supply of M1 and M2, and the prediction could be very likely be the opposite of the actual situation.

Real estates loans are not overheating. In consumers' total expenditures, housing spending should account for a big share, which is 30 per cent in some foreign countries. With the continuing increase in people's living standards, housing loans are playing an increasingly dominant role in the loan structure.

Urban residents' housing situation still requires further improvement, and the rapid urbanization process requires the construction of more houses.

The problem with the real estate market is that the development of high-end residential houses is fairly rapid, while there are not enough low-end homes to meet demand. A readjustment is needed for a reasonable real estate market structure to develop.

Another key yardstick for an overheating economy are rocketing share market indices. So far this year, there has been no such a trend on the domestic stock markets.

Though the indices in Shenzhen and Shanghai markets demonstrated a moderate climb in the first quarter, they began to dive from April. There is now no momentum for a dramatic increase.

From the above analysis it could be concluded that China's economic development is not overheating at all.

For the period to come, macroeconomic policies should be readjusted to make sure that investment should be tilted in favour of labour-intensive industries, the service sector and smaller enterprises in order to boost employment.

Real estate loans should give preference to low-end housing targeting the middle and low-level income brackets.

In this way, urban and rural residents could benefit more from rapid economic growth.

The author is deputy-director of the Office of Economic Research under the Party School of the CPC Central Committee.

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