Slowdown signs

The steel sector was turning white hot. Coke was running short, sending prices up. Cement and other commodities were running short, and getting expensive too. But after months of Cassandralike warnings about the risks of China's economy overheating, there are more and more signs that economic activity is cooling down.

The National Bureau of Statistics reported that industrial output rose by 17.5% in May – down from April's rise of 19.1%. The People's Bank of China reported that M2, the broadest measure of the money supply, rose by 17.5% in May, compared to 19.1% in April.

The data also indicated renminbi loans increased by only 18.6% in May 2004. That was down from 19.8% for the corresponding period a year earlier, suggesting to analysts China's economy is slowing down.

The statistics bureau also reported that growth in fixed asset investment slowed. It stood at US$52.9 billion in May – an increase of 18.3% year-on-year, compared to an increase of 21.3% in April.

In the first five months of 2004, fixed asset investment grew by 34.8% year on year, compared with 42.8% for the first four months. In the first two months of 2004 fixed asset investment had shot up 53% year on year. It was all proof to the government that its policies aimed at cooling the economy are working.

Foreign direct investment also showed signs of slowing down. The Ministry of Commerce reported China's direct foreign investment grew by 11.3% in the first five months of the year – a marked slowdown in growth compared to the same period last year, when it grew by 48%. FDI for 2004's first five months was US$25.91 billion. The ministry did not give May figures, but subtracting the first four months from the total indicated May FDI was US$6.29 billion, a very modest 15% increase over May 2003.

Columbia University Nobel Prize-winning economist Robert Mundell, on a visit to Beijing in mid-June, said he couldn't understand why Beijing was getting so excited. He told a conference co-sponsored by the State Development and Reform Commission that China's economy was not overheating and that while first quarter economic growth was high, it was not exceptionally so. He conceded that the consumer price index in May had, indeed, posted its highest increase in seven years – 4.4% – but even that was not exceptionally high for a country at this stage in its development, he said.

Premier Wen Jiabao, on a tour of Hubei province in mid-June, seemed pleased with the results of recent efforts to slow the economy. He said over-investment has dropped and that with slower growth of money supply and credit, production prices had begun to decrease, but that the economy was continuing to grow and government revenues are up.

There are already predictions from some quarters that the deflationary trend could resume again at some point later this year.