Signs Promise Economic Pickup

Seven years after the world's most rapidly growing economy relaxed its pace, China's economists are again seeing light at the end of the tunnel.

Major macroeconomics indices show encouraging signs of a strong pickup during the first five months, including a rare rise of consumer price index that was interpreted as heralding in the end of 22 months of deflationary woes, increasing confidence among economists that the economy would finally return to an upward path this year.

China's gross domestic product (GDP) grew by a bullish 8.1 per cent in the first quarter, amid other signs of a strong recovery. Exports soared 36.8 per cent year on year to US$92.3 billion in the first five months; fixed asset investment by the State sector surged by 9.5 per cent to 523 billion yuan (US$63 billion) in the first four months; retail sales jumped 9.1 per cent to 257 billion yuan (US$31 billion) in the January-April period.

The surprising performance of the economy has led to a wave of upward revisions of forecasts by economists, who were still split over the prospect at the start of the year.

"This year's GDP growth is sure to be higher than last year, as has become a consensus," said Xu Hongyuan, director of the Economic Forecast Department under the State Information Centre (SIC). China's GDP grew by 7.1 per cent last year.

Xu put the GDP growth for 2000 at between 8 per cent and 8.5 per cent while most economists predicted the figure would come in between 7.5 per cent and 8 per cent.

Increased investment, supported by huge amount of national debt, and the upsurge in exports, largely backed by a recuperating world economy, are widely seen as major factors for the January-May boom.

The stimulative effect of an expansive fiscal policy, which had been gathering steam over the past couple of years, is going all out, increasing exports as well as heating up consumption.

The government started at the beginning of the year with a 100 billion yuan (US$12 billion) national debt issue plan, following the floating of an extra 60 billion yuan (US$7.2 billion) treasury bonds in the latter half of 1999, to stimulate the lackluster domestic demand.

"This (national debt) has been the determining force behind the rapid growth of fixed asset investment in the first five months of the year," Zheng Xinli, spokesman for the State Development Planning Commission, said last week.

The Asian economies that have been recovering from the regional financial crisis that erupted in late 1997, as well as governmental measures to help ailing exporters, had been driving the robust growth of exports in the five months ending in May, they said.

China raised tax rebate rates on export-orientated commodities twice last year, throwing crucial support behind its exporters seeking a cure for the hangover from the financial crisis.

In the coming six months, more positive factors are backing the optimism of economists, including gigantic investment plans in western China, the country's pending entry into the World Trade Organization (WTO) as well as the sustained improvement of the world economy.

"China's ambitious plan to promote growth in the western areas, which is expected to shift into high gear later this year, will lead to hefty investment increase in the coming months," Chen Zhengrong, economist with the Haitong Securities Co, said.

A total of 100 billion yuan (US$12 billion) worth of contracts were signed between western and coastal provinces in an April trade fair.

On another front, China's long-sought entry into the WTO, which is expected around the year's end, would heighten expectations on investment returns by foreign investors and therefore increase foreign capital inflow to support economic growth, Chen said.

China contracted foreign investment worth US$11 billion in the first quarter, a 27 per cent surge from a year ago, official statistics indicated.

The world economy's expected continuation of improvement would leave more room for China's exports to grow in the latter half of the year, Chen said. The all-year growth of exports could hit as high as 15 per cent, he added.

The International Monetary Fund in April raised its world economic growth forecast for 2000 to 4.2 per cent, 0.7 of a percentage point higher from the previous one.

Despite optimism that economic growth would accelerate this year, economists are still worried if the rebound would be sustainable as private investment remained in a rut and there are still uncertainties shadowing the growth prospects of exports in the latter half of the year.

"Next year is more decisive, since the economic growth is still led by government investment, rather than spontaneous improvement in the demand-and-supply relationship," the SIC's Xu Hongyuan said.

He said another 50-70 billion in treasury bonds should be issued beyond the plan in the latter half of the year to prime the influx of private investment, or investment by collectively-owned or privately owned enterprises and individuals.

"Experience has told us that when the expansive public spending policy slackens, economic growth will slow down," he said.

Xu said the pace of national debt issuance could be eased only when prices have been driven up to growth rates between 3 per cent and 5 per cent and predicted that the lingering deflation, marked by a declination in prices, would come to an end around the end of the year.

China's consumer price index rose by 0.7 per cent in February, the first time it returned to positive territory since April 1998.

"Limited funding channels and excessive debt burdens by township enterprises, as well as a lack of profitable projects to invest in, have been hampering the growth of private investment," Wang Guogang, senior economist with the Financial Research Centre under the Chinese Academy of Social Sciences, said.

In a related development, growth of exports is still doubtful in the coming months since the effect of stimulative policies is expected to subside and the US economy has shown signs of overheating.

Long Guoqiang, economist with the State Council Development Research Centre, warned last week that export growth would slow down in July and growth throughout the latter half of 2000 would be lower than the first half of the year.

Wang also cautioned against being too optimistic, saying that more attention should be given to the economic structure rather than the growth rate.

For sustainable economic growth, "the key point is whether we have done a good job in improving the economic structure," he said.

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