The latest results from key economic indicators show that China's over-heated economy has shown some signs of a slowdown as a result of tough fiscal and monetary measures implemented by Vice-Premier Zhu Rongji as part of his July 1 austerity plan.
Although inflation is still running high, there were encouraging signs from measures of fixed asset investment and industrial output which both showed modest decreases in August compared with figures for July: fixed-asset investment dropped by 10 per cent and annualized industrial output decreased 1.7 per cent to 23.4 per cent. Another ground for cautious optimism was the increase in bank deposits which rose by 24.75 per cent, year-on-year from last July. Zhu raised interest rates as part of his austerity drive and citizens have been successfully persuaded into depositing their money in banks, rather than investing in dubious real estate and stock market schemes which only served to fuel speculation and encourage the birth of high-risk ventures.
The recent stability of the RMB, through macroeconomic controls rather than, authoritarian government fiats, has contributed to bank deposits by discouraging the previous necessity of hedging against the formerly volatile Chinese currency (its true value reflected in the thriving black market).
In spite of these advances, progress towards some critical targets eg substantial recall of unauthorised loans, the reassertion of government authority over the provinces) the austerity plan has yet to be significantly achieved and the foreign trade imbalance continues to widen. Zhu's measures to tighten credit by calling strict control of bank lending are intended to curb loans to speculative, high-risk investment but have inadvertently led to shortages of working capital for perfectly profitable, low-risk business and high priority projects mandated by the central government.
Addressing this unfortunate side effect, the government is now taking supplementary action by easing restrictions on direct investment by foreign companies. For companies with technology to share, these incentives may be in the form of tax breaks and consent to charge foreign exchange in whole or in part for sales in the domestic market on the basis of "import substitution" ? at present, most Foreign-invested enterprises rely on exports as the easiest way to obtain hard currency. Access to foreign exchange will be more easily achieved once the foreign currency swap-centres are networked.
No effective measures have been found to reduce the expanding foreign trade deficit as imports continued to outpace exports in the first eight months of the year by US$5.73 billion. This situation has been exacerbated by the flourishing environment for joint ventures which, on the whole, the government wants to encourage, but which requires the import of large quantities of machinery and raw material from overseas.
Last year China recorded a surplus of US$4.4 billion. China will have its first foreign trade deficit in four years and unless stricter measures to selectively tighten credit prove effective the situation is likely to deteriorate. In this case there is a risk that new and broader measures will be introduced, obstructing development.
It is too early to tell whether inflation (official reports estimate that nationwide inflation will be around 13 per cent ? more than double the official 1992 figure of 5.2 per cent) can be brought under control ? reports from big cities show no signs of slowdown. Figures for July show that inflation is running at 23.3 per cent in 35 major cities, with the rate in Guangdong Province more than 50 per cent higher than the average at a worrying 36 per cent. China is tying hard to control inflation partly through reducing the rate of growth of its money supply, which official reports maintain will be kept under 28 per cent for the rest of the year, compared with 33 per cent a year earlier. In a cash-driven society where most citizens have not seen a cheque or a credit card, controlling the growth of money will prove to be easier on paper than in practice.
In any process of radical reform there will be mixed signals initially. It has only been two months since the austerity measures were announced, and it is encouraging to find some positive signs. Larger issues, such as inflation and the trade imbalance will require more time for measures to really take hold. Zhu is moving in the right direction and is continuing to implement supplementary measures to fine-tune the economy by modifying policies which have proved to be less effective than originally planned.
With large-scale banking reforms underway, the continuing (transition towards capitalist-style markets, and more autonomy, the longer-term prospects remain bright. *
Batey Burn, 701 California Tower, 30-32 D'A uilar-Street, Central, Hong Kong. Tel: +852810 0211, Fax: +852 8101788