China’s economic controls effective but results slow
According to
China's Vice Premier Huang Ju,
China's actions to control investment in the economy, particularly in sectors such as cement, aluminum and steel, are indeed working. The measures to rein in the overheated economy have begun to pay off and have eased over-investment in the Chinese economy, sources say. However, economists and analysts are careful to warn that the results are only the beginning, and the economic program should not be relaxed.
China, the world's fastest growing country, has been targeting to reduce economic growth this year to 7% from a high of 9.1% in 2003. Current economic indicators show that the measures implemented by the government are working. For example, growth slowed to 9.6% in the second quarter, from 9.8% in the first quarter. And the Chinese Central Governor reported that consumer-price inflation, which remained at its seven-year peak in August at 5.3% still remains stable.
Government reports last week showed that inflation was unchanged last month from July, while
investments in fixed assets such as factories and roads grew more slowly in August by 26% in comparison to the 31.1% growth rate recorded in the first seven months of the year. The government also tightened bank lending and
construction project approvals to curb in the industrial boom that has been responsible for power shortages, and driving up raw materials prices as well as backing up transportation routes across the overcrowded country.
As some steel producers are experiencing major coal shortages, sources say that
China is in the midst of its worst power crisis in 20 years. Most experts attribute this to lack of planning and excessive growth, causing
China's demand for power to exceed the limits of the country's power
production capacity. However, this excessive power
consumption is expected to ease toward the end of the year as the government has raised electricity prices in four major regions by an average of Yuan 0.022 ($0.0026) per kilowatt hour, marking the second hike this year and the government's macroeconomic control measures aimed at slowing the overheated steel, aluminum and cement sectors have weakened power demand in the country. Yet according to an official from
China's State Grid Corporation,
China will continue to be burdened by power shortages this year due to shortages in coal supplies.
On the positive side, however, the president of the State Grid Corporation of
China states that by 2006, with the government's economic controls to cool the economy taking effect and the country's power supply capacity increased,
China's power supply will likely meet national demand. In June of 2004,
China's power
production capacity reached 400 million kw, and the country's power generating capacity is forecasted to reach 4,600 billion kilowatt-hours by 2020, at which time the corresponding generating capacity will reach 1 billion kw.
China's steel market also showed signs that it is cooling down. In the first eight months of 2004,
China imported 22.15 million tons of finished steel products, down 10.9% compared to the same period of last year. In the month of August,
China imported 1.86 million tons of steel products, marking the country's first month of less than 2 million tons of finished steel imports since the end of 2002.
The government has also acted upon its decision to clean up the local steel industry on the basis of environmental and safety standards. For example, five mills in Hebei Province have been shut down due to violations of environmental protection laws. According to news sources, the province has closed down over 300 small steel mills since 2000 in order to maintain a competitive environment for the local steel industry. In addition, in Tianjin municipality, the local government has implemented special regulations to clean up and remove all steel mills that produce inferior quality steel and to destroy the facilities immediately.
This month
China's Central Bank will meet to decide whether to raise interest rates again following a review of August's economic reports. A majority of economists are predicting that the Central Bank will raise interest rates by a minimum of at least half a percentage point. Although some economists disagree and claim that the government will not raise interest rates for at least three months because it is more worried about the possibility of a serious economic slowdown than it is about excessive investment growth. Instead, they believe that the Chinese government will rely on reductions in bank lending.
According to investment fund managers, now that the government believes its economy is cooling,
China is likely to relax its tightening measures, which is good news for companies who consider
China a major market. They feel more relaxed about Chinese austerity measures and more confident about a soft landing there. At a meeting held last Thursday between
China's Vice Premier and the Chairman of
Australia's Commonwealth Bank of
Australia and his delegation, Ju stated that
China is hospitable to new investment from foreign financial institutions to enhance the country's economic development.