The Asian Development Bank (ADB) annual economic forecast, released Wednesday, indicates that the world’s sixth-largest economy will continue to grow rapidly this year but at a slower, 8.3-percent pace. In 2005 growth is likely to slow further, to 8.2 percent.
China's growth this year will account for 15 percent of the expected expansion in the world economy, even though the country accounts for only about 4 percent of the global gross domestic product (GDP), the ADB said.
China's GDP last year jumped 9.1 percent and soared nother 9.7 percent in this year's first quarter. The government has set its growth target at 7 percent for this year.
Consumption will accelerate slightly, to about 9 percent, in 2004 and 2005, underpinned by rapid nationwide urbanization and improving consumer confidence, predicts the ADB.
Investment growth will likely be cut nearly in half, to around 16 percent, in the same period as the government tightens credit in several sectors, including real estate, ferrous metals, aluminum and automobiles. The ADB forecasts that the higher housing costs resulting from a lending crunch will dampen real estate investment, while foreign direct investment inflows will grow moderately.
The government will gradually phase out its expansionary fiscal policy and slow investment in government-sponsored projects, the bank said.
"FDI will enhance the productivity of immobile factors of production," said Zhuang Jian, an ADB economist. "The benefits are especially important in connecting China's economy to the global economy, and in the area of technology transfer."
Two factors determine whether a country will attract FDI: the commercial profit potential of targeted investment projects and a politically stable environment, Zhuang said. In China's case, as profit margins in some overheating sectors decline and economic growth slows, the average returns on FDI will dwindle.
To attract more FDI, the government must make investment rules and regulations more transparent, Zhuang advised.
"The government should also clearly identify the agencies that are responsible for issuing licenses, permits and approvals."
Investment was the main driving force behind China's soaring GDP growth last year, according to the ADB. Investment contributed 6.3 percentage points to growth, while consumption contributed just 3.9 and net exports subtracted 1.1 percentage points from the total.
Fixed-asset investment leapt 26.7 percent in 2003, while public sector investment surged 28.2 percent.
Signs of economic overheating include the high rate of investment growth as well as the rising prices of raw materials and shortages in some sectors, the ADB reported.
Power consumption increased rapidly last year, with 21 out of 31 provinces experiencing blackouts.
The bank predicts that the rise in the consumer price index will likely accelerate moderately, to 2.7 to 3.0 percent in 2004 and 2005. The current grain price increase will continue until later this year, while costs for energy and raw materials will rise.
The People's Bank of China (PBOC), the nation's central bank, might raise the benchmark interest rate if inflation continues to soar, said Bruce Murray, the ADB's resident representative.
China experienced serious inflation a decade ago, but that ended when the Asian Financial Crisis began in 1997. The inflation rate in 1993 and 1994 soared to around 25 percent.
China's local governments are partly responsible for the country's ongoing investment fever, Murray said. While the central government must take the blame if the economy turns sour, local governments only care about job creation and regional GDP growth. As a result, a higher interest rate might not dampen local governments' investment enthusiasm.
The government might also be considering using administrative power to help eliminate excess investment, according to the ADB economists, but they suggested that it should better coordinate fiscal policy with monetary policy to achieve that goal.
A soft landing of the red-hot economy is badly needed, they added.
(People's Daily May 8, 2004)
