|
|
 |
|
 |
|
|
|
|
|
|
China 2005 Forecast |
|
|
|
|
The critical policy dilemma facing Chinese authorities in 2005 will be their ability to engineer a soft landing for the Chinese economy, or a hard landing, where the economy slows below trend, after spending a period above trend. This delicate task has become necessary because the Chinese economy, having grown near double - digit rates, has spawned several serious speculative bubbles, especially in the construction sector of the fast growing coastal regions. The problem is exacerbated further by the recent decline in the dollar. Since the Chinese pegged the yuan to the dollar at the fixed rate of 8.3 yuan/dollar the decline in the greenback has forced Chinese monetary authorities to print more yuan in order to preserve the exchange rate - an action that has only increased the inflationary pressures in the economy.
In order to stem some of these speculative impulses and protect the economy from a potentially damaging bursting of the bubble, Chinese authorities have taken pre-emptive measures to remedy the imbalances. For the first time in nine years they increased interest rates by 34 basis points and announced that they will lower the money supply growth targets from 19% to 15% in 2005. As for the main question of currency revaluation, unless forced by world events, the Chinese are unlikely to voluntarily revalue the yuan in 2005. With the need to gainfully employ almost a billion workers and with large parts of its interior stil far from being fully modernized, Chinese policy makers wouldl |
|
prefer to maintain the peg in order to expand their productive capacity. The peg offers the Chinese a tremendous competitive advantage by making their de facto dollar denominated goods cheaper in the global marketplace. Should the country suddenly abandon the peg, all of the export driven sectors would suffer a sudden and quite possibly substantial decline in demand. As one example, Wal-Mart which procures over $15 Billion worth of goods in China would instantly see its costs rise and would be forced to pass on those increases to US consumers who would curb their demand in the response. In keeping with the stated policy goal of controlling economic growth in 2005, Chinese authorities are likely to implement further restrictive monetary actions, including more interest rate hikes this year. Some analysts have questioned the efficacy of such policy, given the lack of proper accounting and risk controls in the Chinese financial system. A more productive way to restrain lending may be by raising reserve requirements for the banking sector. The recent announcement by the authorities that they will seek to reduce the growth in the money supply appears to suggest that they also feel that this would be a more effective course of action. Regardless of the means, the general focus of Chinese monetary policy in 2005 will be clearly on containment, which could have a dampening effect on the country's GDP growth. |
|
|
|
|
|
|
|
2005 Implications |
|
|
|
|
As the leading global low cost manufacturer of a broad variety of basic industrial and consumer goods, China should continue to expand at a healthy albeit slower pace of 6%-8% growth in 2005. The country is expected to gradually move towards more sophisticated modes of production this year as it sets designs on higher value added products. Several hints of this transition have already been seen at the end of 2004, with Lenovo's purchase of IBM's PC unit in December for $1.25 billion and Chery
Automobile's announcement that it intends to import up to 250,000 automobiles into the North American market in the coming years.
The country's entry into the WTO and access to G-8 meetings should also create a more transparent and efficient code of business standards. According to recent interview by Qiao Xiaoyang, vice secretary-general of the Standing Committee of the National People's Congress and deputy director of the NPC Law Committee, "the most important impact of China's WTO entry is that it further promoted and accelerated the formation of the idea of rule by law and it established more firmly the idea of governing by law, act by law and just jurisdiction." Yet, many analysts wonder if China will truly be able to comply with international standards of rule of law, respect for intellectual capital and accurate contract enforcement. Chery Automobiles is already embroiled in litigation with General Motors, which claims Chery's QQ model is a copy of its Chevrolet Spark. More damaging still is the country's tendency to subsidize many losing enterprises, a practice that stemsfrom what is still a largely command driven economy. George Gilboy, an affiliate researcher at the Massachusetts Institute of Technology and for the past decade, a senior manager at a multinational firm in Beijing, says that many Chinese businesses fail not because of poor products, but because of lack of organization and business strategy skills. Capricious government dictates often skewer management decisions and sabotage the development of sophisticated business practice techniques. On a more positive note, the recent discovery of a potentially huge oil reserve in the Bohai |
|
Basin could provide tremendous benefits to an ever more energy demanding society. Exploration teams believe the Bohai Bay Basin in northern China may hold 20.5 billion tons of oil reserves, enough to sustain the country's energy needs for a considerable time. Nine billion tons have been proven with the remaining 11.5 billion still needing to be further explored. At present, China consumes 308 million barrels per year. The Bohas Basin discovery, if proven accurate, would not only provide China with a domestic source of energy, but would also allow it to expand its industrialization program more rapidly and at a much more favorable cost. Overall, despite the natural problems of an immature market economy, 2005 should further solidify China's status as the "factory" of the world. As it's economy expands and China's wealth grows, it will become not only the critical center of production but a major consumer market as well.
- ADVERTISEMENT -
 |
|
|
|
|
|
|
|
