The possibility of an overheating China has emerged as one of the pre-eminent concerns of the 2004 economic calendar. Many point to the investment-fuelled 9.7% GDP growth in the first quarter as a key indicator that the PRC could pop at any moment. Others suggest that excessive reliance on imports of raw materials and accelerating inflation are signs the China story could take a hit.
Speculation about what kind of landing China will experience, when it will happen and how the Asian and global economies will weather the expected blow, are rampant. But there is a near unanimous consensus that China will experience a slowdown in GDP growth to annualised range between 7% to 8% towards the end of 2004.
Dr. Andrew Freris, chief economist, head of fixed income research, Asia-Pacific for BNP Paribas is not buying into the puff that China will overheat. Although he expects GDP growth to decelerate to 8.0% in 2004, Freris forecasts that the impact on global economies will be minimal and that a 1.7% slip in growth is neither a hard or soft landing.
According to Freris, many in the economic community are talking the negative talk, but are not looking at the bigger picture of China. He points out that an 8% growth rate is consistent with historical trends and asks the question whether China experienced a crash landing in the early 90s when GDP growth dropped from 13% to 8%.
"The concept of overheating needs to be qualified," Freris asserted during his press conference. "No one seems to have any idea what constitutes a crash-landing."
Outlined in the presentation were nine telltale signs that Freris believes define an overheating economy and a subsequent crash landing. Accelerated inflation, falling unemployment, wage increases, historically high and rising asset and property prices and rising interest rates are among some of the features Freris stresses represent an overheating economy.
Freris counters these indicators by bringing figures into the equation. He argues that CPI inflation in China is not driven by the traditional avenues of investment and/or consumer spending, but almost exclusively by food prices, which soared 10.2% in April. Consumer spending has remained relatively flat since 1997 and in his view, the year-on-year inflation growth of 3.8% in April 2004, is of minimal concern when compared with the October 1994 peak of 27.7%.
The poor performance of the PRC stock market over the past year is also pointed out by Freris as a key indicator that a bubble is not forming, as is the price of land, which appears to have peaked.
The effect posed by a stabilising Chinese economy on a global scale will be fairly insignificant, projects Freris. He asserts that assessments of China's position in the global market have been misrepresented by the Purchase Power Parity (PPP) system, which works on the assumption that an exchange rate with US dollar is incorrect. Going by the PPP rationale, China's contribution to global GDP was 12.6%, which he considers unfeasible.
Trade is used as example where the PPP data is misleading. Freris asserts that exportera and importers are not paid in PPP-adjusted US dollar terms, and therefore, China's contribution to global trade should not be weighted under this system. Using nominal US dollar terms provided by the IMF and Economic Intelligence Unit, he puts China's share of world exports at 6.0% and imports at 5.5%.
"China does not dominate world trade," Freris comments. "The growth of Chinese exports increased the growth of global exports by 20% in 2003, but some years it contributes more to growth than others."
Freris also jumps into the debate on Chinese consumption of raw materials and commodities by suggesting that mass usage by the mainland should not be blamed for contributing to global price increases. According to Freris, global oil production consumed by China is not more than 7%, with 65% of consumed oil coming domestically.
He recognises the Chinese economic landscape does have its share of problems. The 40% increase in state controlled investments in the first quarter of 2004 is a concern, as is the disputed percentage of non-performing loans (NPLs). However, he believes these nuisances and the surge in imports and exports will not contribute a slowdown or crash-landing.
He believes China's position on the global stage is still in an infantile stage and is highly exaggerated. A marginal decline in GDP growth will not hinder the acceleration of the global economy because China is not a big enough player. The question now remains whether Freris's conflicting projections will be considered maverick or gospel over the next six months.
