China to succeed in cooling down heated economy: analysts

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Last updated at: (Beijing Time) Sunday, November 16, 2003

China to succeed in cooling down heated economy: analysts

China may be succeeding in its attempt to cool its overheating economy and avoid a hard landing, analysts said after the release of key figures for last month's national performance.

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China may be succeeding in its attempt to cool its overheating economy and avoid a hard landing, analysts said after the release of key figures for last month's national performance.

Financial institutions extended 61.6 billion yuan (US$7.4billion) in new loans in October, a decline of 14.6 percent from the same month a year earlier, and the first year-on-year monthly drop this year.

"It indicates that credit tightening is really working," said Chen Xindong, chief economist at BNP Paribas in Beijing.

"Even if corporate liquidity doesn't feel like it is tightening, it will do in the coming months," he said.

This year has seen China's robust economic expansion accompanied by concerns that the growth, particularly in real estate, automobiles and certain metals, is spinning out of control.

But it is likely that the central bank has managed to avoid an ugly end to China's latest period of economic expansion, analysts said.

The government has responded by pushing the monetary levers, trying to make it harder for expansion-eager companies to raise money for new investments.

Recent moves include a decision made in September to raise the amount of money that commercial banks need on hand to seven percent from six percent of total deposits.

As tighter credit conditions feed through the system in the coming months, industrial output growth is one area that is likely to decline from the steep 17.2 percent seen in October, analysts said.

"When the credit tightening policy takes effect it's going to cool over-investment," said HSBC economist Qu Hongbin, adding that this would slow growth.

"There's still a good chance that the country will have a soft, rather than a hard, landing," he said.

Paradoxically, even as China's policy makers are telling businesses to slow down, the country is likely to remain the world's fastest growing major economy, according to analysts.

The Chinese economy expanded by 8.5 percent in the first nine months of 2003, even though the outbreak of Severe Acute Respiratory Syndrome forced major industries to a standstill earlier this year.

"A lot of government officials think that growth is sustainable at around nine percent," said Citigroup economist Yiping Huang.

"There is the possibility of some easing but I don't expect to see it below eight percent anytime soon," he said.

A 30-percent decline in foreign direct investment in October from a year earlier did not prove that China is losing its allure as a favored destination for international capital, said HSBC's Qu.

"It's not really surprising to see some volatility in the growth rate," he said.

"The overall direction is that manufacturing will continue to relocate the labor-intensive stages of production into China and that is going to continue for a while."

The value of investment contracts signed during the month rose 43 percent from a year earlier, suggesting that once companies implement these contracts, money will start pouring in again.

Trade figures also reflected that China's increasing role as the world's manufacturer is secure, according to observers.

China said its monthly trade surplus in October swelled to its highest this year, at 5.7 billion dollars from 290 million dollars in September.

Source: agencies

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