Thursday, July 21, 2005

China's Economy Hits Expansion Rate of 9.5%

Robust Growth May Ease Path to Loosen Yuan Peg

By JASON DEAN Staff Reporter of THE WALL STREET JOURNAL July 21, 2005

BEIJING -- China's economic expansion accelerated to a surprisingly rapid 9.5% during the second quarter, as robust factory production and galloping exports propelled growth despite government efforts to rein in the economy.
China's economy this year has consistently outpaced expectations. The April-June period's 9.5% expansion in gross domestic product from the year-earlier period beat an average forecast of a 9.3% increase, according to a poll of economists by Dow Jones Newswires. It also surpassed the 9.4% expansion in the first quarter of this year. Several economists said the figures released yesterday by the National Bureau of Statistics portray an economy enjoying the relatively rare combination of healthy growth unafflicted by worries of inflation. While some economists see signs that growth could taper during the second half of this year, they said the chances of a sharp falloff seemed to be diminishing.
"The numbers are quite reassuring," said Fred Hu, a managing director at Goldman Sachs Group. "The single biggest fear in terms of cooling the economy was to prevent a hard landing. Now with many quarters [of continued strong growth], we see that scenario won't materialize." The latest numbers could make it easier for Beijing to move ahead with plans to loosen the exchange rate of the yuan, economists said. The Chinese currency is effectively pegged at about 8.28 to the U.S. dollar, a level that the U.S. and other major trading partners say undervalues the yuan and helps fuel China's ballooning trade surpluses. China has long said it aims to let the yuan trade more freely, and analysts said the continuation of strong growth along with relatively stable prices could set the stage for such a move.
"It's a good time to let the [yuan] appreciate," said Ha Jiming, chief economist at China International Capital Corp., or CICC, an investment-banking joint venture between China Construction Bank and Morgan Stanley.
One concern about revaluing now has been the prospect of a return to the deflation that plagued China during the late 1990s, because a pricier yuan would put downward pressure on prices.
However, Zheng Jingping, spokesman for the statistics bureau, played down concerns over both inflation and deflation. While oversupply is pressuring prices for many consumer products, he said, prices for raw materials such as oil and electric power are still rising rapidly. The consumer-price index rose 2.3% during the January-June period from a year earlier, and just 1.6% during June, compared with 3.6% during the first half of 2004. "The rise in consumer prices will be relatively moderate" this year, Mr. Zheng said, but "the possibility of declining prices is small."
In a separate announcement yesterday underscoring some analysts' sanguine view of China's economy, Standard & Poor's upgraded China's sovereign credit rating. Citing progress on government efforts to shape up China's shaky financial system and state-owned sector, S&P raised China's long-term foreign-currency rating by one notch, to single-A-minus from triple-B-plus. S&P analyst Ping Chew said China's strong economic growth, along with changes to government companies and the banking system, have produced a "virtuous cycle" that reduces the likelihood the government will have to undertake expensive bailouts in the future. S&P said nonperforming loans in China are likely to total 25% to 28% of total loans by year end, down sharply from a similar estimate of 45% in mid-2003.
Serious concerns about China's economy remain. Some economists worry that investment growth is still too high, raising the risk that the overcapacity already plaguing many industries will worsen. Fixed-asset investment, or spending on items such as factories and infrastructure, rose 28.8% in June from a year earlier, and increased 25.4% for the first half overall. That compares with growth of 31% in the first half of 2004.
Other analysts see signs that China's growth is likely to slow to a more sustainable level. Mr. Ha, of CICC, said export growth during the second half is likely to slow, given the high growth rates achieved late last year. Exports during the first half rose 32.7%, giving China a trade surplus of $39.65 billion -- larger than the surplus for all of last year.
Chen Xingdong, an economist with BNP Paribas Peregrine in Beijing, says growth is actually already slowing. He says nominal growth in GDP is a more reliable indicator than the real growth figure, which the government adjusts based on its measure of inflation. Nominal GDP growth has slowed markedly during the past several quarters, to 13.2% in the latest quarter from 17.4% at the end of last year, even as real GDP growth has remained relatively constant at close to 9.5%. "The growth rate has peaked and is now slowing," Mr. Chen said. "The soft landing is in progress, but [the economy has] not landed yet."
--Kathy Chen in Beijing and Andrew Batson in Hong Kong contributed to this article


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