Economy Kept on Right Track

Although the current economic slow down in the United States is affecting China's foreign trade, experts maintain that the overall Chinese economy will keep on the right track.

Earlier this month the Ministry of Foreign Trade and Economic Co-operation announced that the growth of China's exports in the first quarter slid 25 percentage points from the same period last year, to 14.7 per cent.

Exports to the United States increased by 11 per cent in the first quarter, compared to 32.8 per cent in the same period last year.

"As more than one fifth of China's exports are shipped to the US, the US economic slowdown will directly slash China's trade surplus," said Zheng Jianming, who holds a doctorate in finance and banking with the University of International Trade and Economics (UIBE) in Beijing.

Worse still, the domestic trade sector will suffer much more than this, he warned.

"The repercussions of the US economic slowdown are global. They will curb the demand of some other major trade partners of China such as Southeast Asian economies, and therefore aggravate the slide of China's foreign trade growth," Zheng said.

In particular, China will see a big decline in trade volume between the mainland and Hong Kong, the second biggest source of the mainland's trade surplus next to America, said Zheng.

"Given that 43 per cent of China's gross domestic product (GDP) is yielded from international trade, the US economic slowdown may hinder China's economic growth to some extent," he said.

Despite the tough prospects for trade, however, many believe that the other two locomotives, investment and consumption, are sound enough to sustain the healthy growth of the Chinese economy.

Experts said China's foreign direct investment (FDI) structure makes the economy immune to risks of a financial crisis.

"Most of China's FDI is composed of greenfield investment, which means most foreign investors make profits by opening enterprises and running their business in the country," said Wang Ye, a senior analyst with China Communication Securities Co Ltd.

Since the 1990s, greenfield investment has been replaced by capital investment, such as investment in securities and transnational merging, as the main form of FDI in the world.

But it has not taken place in China because the Chinese stock market is not fully open to the outside and the convertibility of Renminbi has yet to be freed up.

"To an extent, such an FDI structure limited the scope of foreign investment in China, but it rules out the potential of turmoil in the capital market caused by drastic moves of large-scale foreign capital," Wang said, citing the 1997 financial crisis in Southeast Asia that devastated the hard-won prosperity of many developing economies in the region.

The stable investment environment has led to a continuous increase of FDI to China in recent years. In the first quarter of this year, investment from US and Japan, the two major investors, climbed by 35.6 per cent and 18.32 per cent respectively, according to the National Bureau of Statistics.

Apart from FDI, domestic investment has been increasingly driving China's GDP growth.

In recent years, China has been pursuing a proactive fiscal policy to back economic growth. The government has issued 360 billion yuan (US$43.5 billion) worth of treasury bonds in the past three years to build infrastructure projects, renovate technologies in State-owned enterprises and foster high-tech sectors.

It is planning to issue another 100 billion yuan (US$12.1 billion) worth of T-bonds this year.

Furthermore, the surplus of deposits over loans in Chinese banks amounts to more than 2.3 trillion yuan (US$277.8 billion), meaning there is tremendous potential for private investment and consumption.

"Although the international economic climate is not very favourable, China can maintain steady growth by tapping the potential of domestic demand," said Wu Jun, dean of the School of Finance and Banking under UIBE.

He suggested that the government tries to increase the income of citizens and create more investment channels.

In fact, the government has been working hard to boost the domestic market. It has helped millions of laid-off workers get new jobs in recent years. Increasing farmers' income has also become one of its top concerns.

And just weeks ago, the Ministry of Finance announced an 80-billion-yuan (US$9.7 billion) budget designed to raise the salary of about 45 million staff members in governmental departments from this year. It is widely viewed as a further move to stimulate consumption.

Statistics show the per capita income of farmers increased by 4.8 per cent in the first quarter, while that of urban residents increased by 4.7 per cent.

"But there are more reasons for optimism about the susceptibility of our economy," Wu said, citing some upturns in the US economy.

On Wednesday, the US Commerce Department and the National Association of Realtors released separate reports, showing that the housing sector, one of the key strengths of the US economy, posed sharp gains in March from sales of new homes and purchases of existing homes.

And last month a report from the US Labour Department showed that the US Consumer Price Index, the main US inflation gauge, rose a larger-than-expected 0.3 per cent in February.

The latest move occurred on April 18, when the US Federal Reserve cut US interest rates to their lowest level in six years, sending stock prices skyward with a surprise show of determination to keep the US economy's record expansion alive.

"These signs send a mixed picture about the US economy. Personally I do not think the current slowdown will clinch for too long," Wu said.

"And that may mean a buoyant forecast for the Chinese economy," he said.







Source: China Daily


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