China's economic growth reached record highs in the second
quarter of this year, noted the World Bank's China Quarterly
Update, which was released in Beijing today. Bert Hofman, lead
economist of the World Bank, said China's economy expanded by
almost 11 percent in the first half of this year with the growth
rate for the second quarter reaching the highest in over a
decade.
Hofman noted the persistent existence of an imbalance in the
economic growth for the second quarter. Industry continued to
outpace services on the supply side and investment remained the
main driver of demand. With export growth continuing to outpace
import levels, the current account surplus has risen to record
highs.
In reaction to recent economic statistics, the Chinese
government had implemented a series of measures to cool down the
economy, said the report. Such measures included monetary
tightening by absorbing liquidity in the interbank market,
administrative measures to limit investment in real estate,
reinforcement of controls and regulations on investment projects
and loosening restrictions on capital outflows.
Hofman said the outlook ahead for China's economy remained
favorable. With production capacity continuing to expand in line
with demand, inflation low and the current account in surplus, the
main policy concern for the Chinese government is not general
overheating.
Rather, the policymakers are worried that high investment could
cause overcapacity in specific sectors and may affect the banks
because loans could turn bad in the future, explained Hofman.
However, he also noted that the government could take some comfort
from the fact that most investment is financed from profits rather
than credit and that the highest investment growth is happening in
largely commercialized sectors where private enterprises play a
significant role.
However, the continued investment boom does warrant concerns
about efficiency. Louis Kuijs, the World Bank's senior economist on
China and main author of the report, said that inefficiency and
waste of resources do exist in specific companies and enterprises
despite favorable profitability in the whole sector. Measures,
including legislative ones are needed to press those whose fates
are doomed to failure but are nevertheless continuing to waste
resources.
On the external side, key risks are sharper than expected with a
slowdown in the US economy and a disorderly resolution of global
imbalances.
"The Chinese government may stay the course on current measures
and await further evidence of their effects before initiating
additional demand-reducing measures," said Hofman. "A drastic
slowdown alone would lower imports and boost the current account,
creating more problems for monetary policy and trade
relations."
A continuation of the recent strengthening of the RMB against
the US dollar could ameliorate part of this dilemma, as it would
raise imports, reduce capital inflows and switch investment to the
non-tradables sector. Also, the latest data suggests that the
recent measures have started to have some effect on monetary
aggregates, which have been expanding beyond targets.
As the Consumer Price Index remains moderate and there is no
significant wage increases, it is highly unlikely that high
inflation may occur, said Louis Kuijs. However, he did caution
against unbalanced growth accompanying the rapid GDP growth. The
current investment boom may give rise to a capital stock that would
no longer be viable once relative prices and standards better
reflected the government's new priorities, he warned.
China Quarterly Update, August 2006
(China.org.cn August 15, 2006)