OBSERVER: One of the world's major economies has been seemingly impervious to the global economic cycle. China will grow this year by about 7 per cent - and over the past ten years it has grown on average 9 per cent each year.
Having grown by 7.3 per cent in 2001, in the most recent data on the first quarter, growth rebounded to 7.6 per cent. By any measure this is a highly impressive performance.
Many commentators query the reliability of the data. It is produced quickly and there may be an upward bias in the method of reporting. However, export data indicate some very buoyant sectors in the Chinese economy.
We have also seen a very expansionary fiscal policy. As the government feared the risk of contagion in the wake of the 1998 Asian crisis, it moved to deficit financing and has been running deficits of around 3 per cent of GDP since then.
In fact, impressive as a national average of 7 per cent growth is, it conceals the surge in activity in many of the coastal cities. Shanghai is probably growing at 15 per cent. The crane count in the Pudong skyline certainly supports such heady growth estimates.
This difference in the pace of activity is also seen in the difference in per capita income figures, which in the coastal cities is three times that of the rest of China.
But what's next? Can such growth rates be maintained? Are there huge opportunities for international companies and investors? This matters not only for the economic health of the Asia-Pacific region but for the global economy as a whole. China is the second-largest economy in the world.
The People's Republic is certainly moving into a more challenging environment. Finance Minister Xiang Huaicheng has indicated that they will need to rein in the expansionary fiscal stance. Chinese policy makers feel the world economy has turned the corner and this will be a strong tailwind for China's growth. As evidence of this, China's exports grew by just under 10 per cent in the first quarter of the year.
But the big all-consuming challenge for China is how it manages membership of the World Trade Organisation (WTO). This is the first year of membership and China has much to do to achieve a smooth transition. How will debt-laden state-owned enterprises (SOEs) and banks cope with the new, more competitive environment? Some estimates put non-performing loans at China's state-owned banks at around 50 per cent of total loans.
China will have to cope with the prospect of significant job losses in the state sector. Some estimate WTO membership will lead to a loss of 15 million jobs in China. In a country that is adding 12 million new entrants to the labour market every year, unemployment becomes a key policy risk. Officially, the current unemployment rate is 3.1 per cent. Unofficially local Chinese commentators admit to a figure closer to 7 per cent. This is likely to rise but it's not clear to see to what level.
This has major implications for pensions and general social security systems in China, which will require significant restructuring and funding to weather the storm. Socially the pain is more likely to be felt in the north-western rural provinces where the SOEs are most dominant.
It is not yet clear what urgency the authorities attach to these issues. It may be too easy to say in the short term that they will be offset by new off-licences, greater productivity and access to new markets but there is obviously a severe dose of pain associated with these changes as well.
One quick fix that China appears to be embarking on is to actually slowdown the process of WTO integration. In banking, for example, new regulations introduced in February stipulate the new foreign entrants can only open one new branch per year. This hardly looks like a level playing field as the big four domestic banks have a total of 130,000 branches
Similarly in the oil sector, both Sinopec and PetroChina, the local oil companies have been given exclusive rights for three years to build new petrol stations before the market is open to foreigners.
Entry by foreign firms into the Chinese market is clearly going to be challenging and piecemeal expansion has proven an unprofitable path for new entrants. French retailing giant Carrefour entered the market six years ago and has 27 stores in China but the venture wasn't profitable until store number 20. These considerations are clearly being weighed up by companies such as Tesco as they consider entering the market.
China has been a frustrating experience for many international companies seeing on one hand the obvious gargantuan potential that it offers and on the other hand the difficulties of actually making profits in the near term. It continues to be a magnet for investment; in the first four months of this year foreign investment rose to $14 billion (€15.2 billion), a 29 per cent increase year on year.
Irish Companies have little direct exposure. Kerry Group derives about 5 per cent of group sales from the Asia-Pacific region. Baltimore Technologies, with its recent Securenet transaction, continues to see the region's potential.
While growth in the economy this year will still be in the 7 per cent range, it will be a tricky balancing act to achieve similar growth rates in the next three to five years with all the strains of WTO membership.
Eugene Kiernan is head of asset allocation in Irish Life Investment Managers
