China's economy coming under pressure

By Rainer Koehler

TOKYO (DPA): Viewed from an economic point of view, the stand- off between China and Taiwan is a double-edged sword.

On the one hand, it provides a useful distraction from the economic problems plaguing the huge empire and gives Beijing an opportunity to replace missed targets in industry with patriotic bull's-eyes.

On the other hand, it will have a detrimental effect by only increasing the planners' worries in the medium-term. Were the very same Taiwan to drastically reduce its investment in China, for example, or resultant pressure on the yuan force a devaluation.

In this light, the latest official half-yearly figures no longer look quite so gilded. At first glance, the government's growth figures do not look nearly so impressive as they did.

With 3.62 trillion yuan (around US$400 billion), the first six months of 1999 produced a glowing annual projection of 7.6 percent in the plus.

A closer look, however, reveals that gross domestic produce only rose by 7.1 percent in the second quarter whereas the three previous months expanded by 8.3 percent.

Regardless of whether one accepts the figures as somewhat massaged -- a view favored by many overseas analysts -- these sums are below the regime's own targets.

Although only seven percent growth is anticipated for the whole of 1999 (compared with 7.8 percent in the preceding year), Beijing's economic planners had always said that eight percent is the minimum in national financial performance that would permit a restructuring of the state's inefficient industry without the risk of social unrest. But even if the official goals can live with that, the important economic factors remain far behind expectations.

For five years mainland China's economy has grown at an increasingly slower pace, compared with the time before 1995 when annual increases of the order of 12.6 percent were still being recorded. At least three gigantic problems are now visible: sinking direct foreign investment, falling exports and weak consumer demand.

It is a phenomenon that has slashed back growth across Asia, particularly Japan, and now it has come to China: non- consumption, deferred demand, call it what you will.

It is clear that growing insecurity in the jobs market, rising outlays in rent and health insurance have taken their toll on individual consumption. Instead of rising by a 7.4 percent as in the first three months of the year, demand increased by a paltry 5.5 percent in the second quarter.

Even the generous state subsidies introduced earlier this year such as lower interest rates or the drastic expansion of consumer loans for just about everything from cars to education have failed to stimulate the customer's willingness to part with money. And this in turn only compounds the ever-present problem of overproduction.

China's trading balance is also no bed of roses, even if it does present a far prettier picture. Foreign deliveries receded by 4.6 percent, while imports increased by an unhealthy 16.6 percent. As a result, foreign-exchange surpluses have sunk, funds without which an overhaul of state money-losers is unaffordable.

This syndrome is made more vicious through a clear hesitance on the part of overseas investors to pump money into the country in direct investment. In the first six months of 1999, 9.2 percent less foreign capital came into the country than the preceding period.

It is true, the amount was still a whopping $18.6 billion, but even before the Taiwan crisis confidence in a profitable Chinese venture had been sinking rather than rising.

The contractually-agreed investments, Beijing's very own economic insurance, sank by a very worrying 20 percent. Taiwanese investors above all are becoming increasingly cautious. Their investments up to the present -- estimates suggest up to $50 billion -- is seen by Taipei as politically endangered. And the latest tension only adds fuel to that argument's fire.

Given the circumstances, there is a growing sense of an impending devaluation and China's economic planners must feel tempted by the prospect of cranking up exports by way of a weaker currency.

For the first in months, Beijing's research institutes and even the press have been discussing whether in view of the fragile economy the government would be better advised to drop its resistance to devaluation if it might help the economy back on its feet.

Capital markets would react cautiously were central bank president Dai Xianlong to explain that the yuan should be pegged closer to demand. A devaluation prompted by Beijing would probably set off a regional currency crisis and mercilessly pull the gradually improving economies of all Asian economies back down to the depths.