The Chinese Economy:Rising prices and trade surplus pressures will have to be managed in 2008, writes Clifford Coonanin Beijing.
While the world's focus next year will be on the athletes gathering for the Beijing Olympics, analysts reckon the government in Beijing is facing some difficult choices as it seeks to juggle a slowing economy, rising prices and political pressure from the US and the EU to do something about its trade surplus and its currency's strength.
People in the region are watching China particularly closely to see how it deals with these challenges - China now accounts for more than 40 per cent of Asia's GDP.
"The trade surplus is going to be the number one challenge and what to do about that. It's a burden domestically, politically, so the biggest challenge will be how to fight that," said UBS Asia economist Jonathan Anderson.
"The combination of gradually slowing exports and rising commodity prices has already stabilised the Chinese trade surplus over the past six months and, with stable demand and better supply discipline over the next 12 months, we expect the trade balance to remain relatively flat during 2008," said Anderson.
"We see growth slowing. We've had 11.5 per cent, and don't see that continuing. Maybe 10/10.5 per cent, primarily due to a falling net export contribution to GDP," said Anderson.
The forecast is in line with other prognoses. Merrill Lynch forecasts that Chinese GDP expansion will slow marginally from an expected full-year outcome for 2007 of 11.5 per cent, to 10.9 per cent next year. "Domestic consumption and investment spending are not 'overheated' at present, and we should see relatively stable domestic growth momentum over the next 12 months," said Anderson.
A distinct possibility is higher interest rates for borrowers in China, combined with a further squeeze on credit arising from another rise in bank reserve ratios as the authorities bid to stem price increases.
"Regarding monetary tightening, with credit growth now approaching 18 per cent year on year, the People's Bank of China should follow tighter credit and liquidity policies next year, aimed at bringing lending back down towards the target range of 15-16 per cent year on year," said Anderson.
"The government may take some restrictive measures, they may introduce some taxes and quotas on concrete and aluminium. Also they may start raising energy costs."
Other challenges facing the government include the equity market, which is looking awfully expensive after a long, long bull run. The Shanghai Composite Index down from its peak of 6,092 on October 16th, to just below 5,200 by early December.
"It's come off 20 per cent but is it going down or up?" said Anderson, who also said the environment and the question of growth in the rural economy remain key issues for the government to deal with.
"Challenge one is keeping property prices under control. Land prices are now up 15 per cent year on year and house prices 10 per cent, and the increases are accelerating," said Arthur Kroeber, managing director and head of research at the Beijing-based economic research firm Dragonomics.
"Challenge two would be keeping loan growth and investment under control. There has been a lot of talk about controlling loans but the problem is that loans only fund about 35 per cent of investment now; the rest comes from companies' retained earnings and stock market listings. With corporate profits up 37 per cent so far this year there is plenty of room for companies to expand investment without recourse to bank loans," said Kroeber.
The third challenge is getting some "real traction" on environmental and energy issues, Kroeber said. "This will require some aggressive administrative measures as well as imposing and enforcing the fuel tax and resource tax they have been talking about.
"If they can do all three they'll be in good shape," he said.
Then there's inflation. The consumer price index hit its highest level for a decade at 6.5 per cent last month, year-on-year, from 6.2 per cent in September. Food prices rocketed 17.6 per cent.
China, and the wider region, will also look anxiously to see whether a recession in the United States will derail growth. The growing strength of China's domestic demand means that it is unlikely to feel a slowdown as acutely as it might have. The euro zone is emerging as one of the most significant sources of final demand for Chinese products and for goods elsewhere in the region.
Paul O'Driscoll, founding director of the property company Investors in Asia, believes the government will seek, or needs to seek, to redress economic imbalances during the year. "There is too much infrastructure investment and not enough development of services," said O'Driscoll. "The east-west divide in China is greater than ever - and the government is looking to foreign direct investment to act as a beacon for local investment.
"China's banks, once notorious for their inability and unwillingness to lend, are now doing so in greater and greater numbers. Consumers generally speaking do not need to nor wish to borrow for day to day spending, but business is booming and with that comes the confidence to 'start' to borrow money. High growth and liberal money supply is a powerful cocktail for the economy that needs to be carefully managed," said O'Driscoll.
So what areas does the Chinese government itself see as key challenges? Well, reform remains top of the government agenda, it seems. The country's economic overlords held talks in Beijing early in December and the outcome was that the country's top planner said the government would step up reforms in key areas such as the economic system, investment regulation and supervision, resource products pricing and healthcare.
"We should further deepen reform in 2008," Ma Kai, head of the National Development and Reform Commission (NDRC), said at the annual working meeting of economic planners.
