'Soft landing' ahead for China's economy

By Li Xin and Yao Datian

The Chinese economy is heading for a "soft landing", which the government projected to save it from a collision course with too high an economic growth rate and inflation. To borrow the government cliche, it is now "basically on a healthy track" and "developing towards the designated goal of macro-economic control."

Meanwhile, experts caution against excess optimism. Using the analogy of a busy highway to make the point, Professor Sun Shangqing, director of the State Council's Development Research Center, says, "The 'stoplight' is turning from yellow to green, and a catastrophe is a sure thing if the 'driver' is impetuous at this moment."

In the wake of hectic growths from 1992 to 1994 with both gross domestic product and inflation soaring to near-crisis proportions, the State Statistical Bureau, at its semi-annual news briefing for the first half of 1995, published a string of figures that do suggest an economic cool-down.

In the first six months of this year, China generated 2,213.9 billion yuan (about US$ 266.7 billion at the current rate of exchange) in gross domestic product. This represented a 10.3 percent growth, 1.5 percentage points lower than the corresponding figure for the January-June period of 1994.

Retail sales prices went up 21.2 percent in January over a year ago, compared with more than 23 percent in December. But the rate of increase went down to 19.7 percent in February, 18.7 percent in March, 18 percent in April, 17.6 percent in May, and 16 percent in June.

The total investment in state-owned fixed assets went up 22.2 percent, compared with more than 30 percent for the January-June period of last year. That meant that capital construction has been trimmed in such a way as to be roughly commensurate with the economy's financial and material capabilities.

Strict scrutiny

In many parts of China, there are more luxurious hotels, golf clubs, recreational centers and others than are actually needed -- the result, so to speak, of an unprecedented construction boom over the past three years. According to the State Statistical Bureau, new projects of this sort are now under "strict scrutiny" by the authorities. Meanwhile, the government has "gained initial success" in giving priority to those badly needed projects in the allocation of construction funds. Enjoying the priority are projects in agriculture, communications, energy and electronics sectors, as well as housing and other infrastructure facilities.

This year's harvest of summer grain -- mostly wheat -- came to 106.53 million tons, the second greatest China had ever brought in, which was 2.25 million tons more than last year's yield.

Summer grain normally accounts for a fifth of the annual harvest, and it is still too early to predict how the autumn harvest -- corn, sorghum, etc. -- will fare, as flooding and other natural disasters are frequent occurrences throughout the summer and early autumn. "Despite that," Professor Sun comments, "this year's summer harvest came as a blessing. The government raised the purchase prices of agricultural products last year, and this boosted farmers' enthusiasm in production."

In the first half of this year, China's foreign trade reached US$ 126.4 billion, with a surplus of US$ 13.2 billion in favor of exports.

Foreign companies invested US$ 16.4 billion in China, 11.3 percent more than in the first half of 1994. "In a way, this testifies to international confidence in China's economy although it is yet to become completely normal," says Sun.

Foreign reserves

What is even more significant, he says, is that China's foreign exchange reserves have grown to over US$ 60 billion, from US$ 51.6 billion at the end of 1994. "People have to know that the figure once plunged to about US$ 2 billion due to the huge deficits to support the country's overheated economic growth," he adds.

But China needs to put aside about US$ 10 billion to pay the interest generated this year by its foreign debts of around US$ 100 billion. The state planning has fixed this year's imports at US$ 120 billion, and that requires US$ 30 billion in what is called "preparatory funds." "Besides," Sun says, "the country needs to have enough foreign exchange to get itself prepared for unexpected situations, like the recent devaluation of the U.S. dollar against the Japanese yen."

This string of statistics does sound impressive, but Sun and other economists stress that "tremendous efforts need to be exerted to bring the overall economic situation back to normal."

The third session of the eighth National People's Congress (the Chinese parliament) held in March called for "vigorous efforts" to "properly handle the relations between the reforms, economic development and stability." As a first step to overhaul the economy, it fixed China's economic growth rate at between 8 and 9 percent for 1995, and the rate of inflation at about 15 percent.

Too hot to sustain

Half a year has passed, and the economic growth is now close to the NPC target, but inflation is still well above it. A complete economic overhaul seems still distant. Sun and other economists agree that given the financial, material and human resources available to China, an annual GDP growth of less than 10 percent, accompanied by no more than single-digit inflation, would appear to be the most the country and its people can afford.

"Beyond that," Sun says, "the economic growth will be too hot to sustain and, worse still, the country's political stability will be affected when too fast an economic growth drives prices too high."

The People's Daily, an organ of the Chinese Communist Party's Central Committee, takes the same approach. In an editorial published in mid-July, it called on "leaders at various levels" to be "sober-minded" with the question of prices. The editorial, entitled Control of Prices Must Not Be Loosened, noted that inflation, although brought down to 16 percent nationwide, still ranged between 17.5 percent and 22.4 percent in 17 of the 31 Chinese provinces, municipalities and autonomous regions. Of the 35 largest cities, only 14 have brought down inflation to below 15 percent.

"No effort should be spared to ensure that the prices will not rise as fast as last year," the editorial says. "This is vital to China's overall economic development and social stability."

If all these policies work, Professor Sun says, China's economic growth and inflation will continue to drop in the remaining months of this year through to 1996, to 9.5 percent and 8 percent respectively.

"Haste makes waste," he concludes. "A development which is stable, sustained while fast enough is what China should strive to achieve."