Measures to cool down overheated economy start to pay off in China

Measures to cool down overheated economy start to pay off in China

Market reports indicate that the measures taken by the Chinese government this spring to cool off the economic growth started working. The rapid growth of Chinese economy slackened for the last two months with key economic indicators that have been taken under control to a certain extent. Looking over these key indicators: 1. Fixed investment: Growth of fixed investment, eased off during January-May period with Yuan 1.5 trillion (around $181 billion), up by 34.8% over last year. 2. Retail sales: In May, retail sales were up by 17.8% over May 2003 to Yuan 416.6 (around $50 billion), however the real growth is less when the effects of SARS outbreak last year, and price increases are taken out. 3. Investment: The measures taken for over-investment in sectors such as steel, cement and real estate decreased the investment growth in these sectors and led to a considerable drop in especially steel imports. 4. Imports: In the first six months, steel imports recorded a decline of 2.5% with 18.04 million tons over the last few years, as reported by SteelOrbis. Steel exports for the same period, totaling 4.56 million tons, indicate an increase of 29.3%. Import-export figures for June 2004 are 2.44 million tons and 1.09 million tons respectively. China recorded its first trade surplus for 2004 in May with exports totaling $44.9 billion and imports $42.8 billion. The second monthly trade surplus was posted in June as exports surged higher than expected, up to $50.5 billion while imports amounted to $48.65 billion. 5. Lending: The significant fall recorded in lending in June, compared to last year, contributed to the slowing of money supply growth. Decline in lending for companies and/or projects was observed mainly in overheated sectors such as construction and real estate, steel, aluminium. However, the decline is not likely to continue for the whole year, as construction sector and some other sectors are reportedly revived in the last few weeks. Besides, banks in China are going to divert their lending to sectors like rail and road transport, port construction and shipbuilding. 6. Money supply: Growth in China's money supply in May slowed by 1.6% over April and 2.7% over last year. In May, money supply increased by 17.5%. 7. Prices: In May, consumer price index (CPI) in China increased by 4.4% over last year. The main reasons behind this increase are food prices which rose 11.8%, and price adjustment in resources such as electricity, fuel and water. CPI for June, which is scheduled to be announced next week, is expected to rise by 5% and by 3-4% for the year 2004. Apart from mentioned indicators, industrial output growth set back despite the increase in output figures. Growth in industrial output fell to 16.2% in June, recording its slowest rate since almost 2 years. For the first half of 2004 growth rate recorded a 17.7% increase over last year and a 0.8% decrease over first five months of the year. By the way, steel products output rose by 17.3%, indicating a growth rate 3.3% points lower than May figure. Although some economists predict that central bank of China might hike interest rates for the first time since 1995, an official from the State Council's Development Research Center (DRC) maintained the contrary, stating that a rise in the interest rates depends on the trend of Chinese economy. As a matter of fact, it is early to forecast the direction of the trend. Another major indicator is Gross Domestic Product (GDP) of China. For the first quarter GDP was recorded as 9.8% and according to estimations it will be around 10.5% in the first half of 2004. National Bureau of Statistics (NBS) declared that GDP for 2004 will reach at least 7% annual growth target, despite the expected slow down in the next quarter. In conclusion, although Chinese economy shows desired improvements, defined as initial successes, measures are decided to remain in effect with no relief in the near future. Changes in these measures will depend on quarterly results of figures such as GDP and CPI.