Global markets collectively gasped in late April at measures taken by the Chinese government to cool its overheating economy. The world was reminded of China's influence over the global economy – and the fine line to be walked between the need to slow domestic economic growth while maintaining China's role as an engine of global economic growth.
China in 2004 overheating mode is vastly different from the overheating of the early 1990s that preceded the "soft landing" engineered by then-Premier Zhu Rongji. There is significantly more foreign investment in China, its links to the global economy have multiplied beyond count and its influence on global markets, particularly commodities, has become much more significant. The rest of the world in 1993 was little more than a mildly interested observer. Today those observers are now participants, as China contributes to economic rebounds in the US and Japan and propels business in virtually every sector of global trade.
Another major difference is that local governments are no longer as easily controlled by Beijing as they were a decade ago. In 1993, Zhu could issue orders to tighten monetary supply and curb fixed asset investment with confidence that his orders would be obeyed.
Today, as then, local governments are being ordered to rein in "blind" investment and to stop approving new projects in the steel, aluminum and cement sectors. So far, these moves appear to have had little impact on investment. Unemployment is a significant problem for local officials nationwide – especially in the northeast and interior provinces – and officials hesitate to heed Beijing's austerity calls if the result could be a rise in local unemployment.
A standoff between Beijing and Zhejiang regarding that booming province's plan to build 25 new power plants in 2004 illustrates the new central-local dynamic. In April, the South China Morning Post cited provincial officials as saying they were prepared to defy limits on power construction, saying chronic power shortages had caused US$3.26 billion in lost production in 2003, taking 2.4 percentage points off the province's GDP growth.
Official statistics for the first two months of 2004 suggest Zhejiang is representative of a widespread local spending boom. National Bureau of Statistics data showed a 65% year-on-year increase in provincial spending, compared to only a 12% increase in central government spending.
With its administrative powers somewhat diminished, the central government is left with primarily macroeconomic levers to micromanage a slowdown in economic growth just enough to avoid overheating, but not too much as to spark a jump in unemployment. These economic levers include, among other things, interest rate shifts and changes to the value of the renminbi.
Beijing's situation today is different in many ways from that faced by Zhu in the early-mid 1990s, but the central government can take heart in knowing that Zhu proved that the Chinese economy can be coaxed back down before burning up in the stratosphere.