Uncertainty clouds China's economic improvements

By H. Asher Bolande

SHANGHAI (AFP): While China's economic performance in the third quarter contains positive signs, uncertainty about political leadership and the sustainability of recent gains clouds the outlook, analysts said Tuesday.

Figures released by the State Statistical Bureau earlier in the day showed economic growth recovering from a slow second quarter to post a 7.4-percent rate during the first nine months of the year.

The country's number-one economic bugbear, deflation, also loosened its grip somewhat, with retail prices down 3.0 percent compared to 3.2 percent for the first half.

"Good things are happening ... but there's a huge cloud of uncertainty hanging over it all," a Western economic diplomat based in Beijing said.

Combined with earlier-released figures showing a resumption of export growth after months of declines, the strengthening of prices "are an improvement," she said.

But she said there was no evidence that deflation would not worsen again in the months ahead.

She and other analysts pointed to an unclear political situation in Beijing as one of the top factors hampering forecasts.

The political consensus of recent years "doesn't look to be there anymore," she said.

Uncertainty at the top not only will have a crucial bearing on reforms and other economic measures in the months ahead but on whether China will accede into the World Trade Organization (WTO) -- which will have a huge impact on foreign investment, the diplomat said.

"I don't think there's a decision on WTO. I don't think (President) Jiang (Zemin) has decided where he sits ... It's so hard to say what the next six months will look like when no decisions have been taken," she said.

Speculation has been strong in recent months that Premier Zhu Rongji -- a determined reformer and advocate of WTO entry -- has lost influence to a more conservative faction led by legislative chief Li Peng.

Bob Broadfoot, a China analyst with the Political and Economic Risk Consultancy in Hong Kong, also listed power shifts atop the Communist Party as a top concern.

"I sense there's a drift toward greater conservatism in reforms," he said, dismissing official economic figures as unreliable.

The new political atmosphere might lead to increased state spending "which could make the numbers look better but won't result in a healthier economic condition," he said.

Broadfoot expressed doubt that numerous outstanding problems with the domestic economy could be fundamentally resolved under these conditions.

Wang Tongsan, a senior economist with the Chinese Academy of Social Sciences, said state investment in infrastructure supported by a special 60 billion yuan ($7.2 billion) treasury- bond issue was behind the gross domestic product (GDP) improvement in the third quarter.

He described the spending as the "main propellor" of the GDP growth.

Wang and other Chinese economists expressed optimism that the worst was past but acknowledged that economic upturn was still weak and needed strong government support to build further.

While recovery in Asia was boosting demand for Chinese exports, other external factors are looking gloomy, Broadfoot said, citing a likely slow-down in the long-booming United States.

The diplomat said Beijing was hoping to attract international capital that has long been plugged into the U.S. expansion.

But she said foreign investors' perceptions that China was the place to go and stay "because it was so hard to get here" were starting to change.

"The pendulum is starting to swing the other way ... I have no trouble believing that it's possible for capital to go to India instead of China in some areas," she said.