Comment
    Growth to retain momentum
    2010-Jun-28 07:58:39

    Extant uncertainties are unlikely to scuttle the robust dynamism shown by the Chinese economy

    The government's stringent regulation of the property market, recent volatility in stock prices and the sovereign debt crisis in Europe have led some to conclude that China's economy is once again at a crossroads.

    Increased risk of the global economy slipping into a recession once again, and growing inflationary worries back home have forced many analysts to believe that the government will likely put a stop to curbs on property sales like it did in 2008, and accord top priority to boosting economic growth.

    Such concerns are groundless.

    China's economy is neither facing such a dire situation, nor is it witnessing enormous changes as it did two years ago.

    Declining share prices and tumbling home sale volumes have not rocked its solid economic foundation.

    Investment, export and consumption, the so-called "troika" of the nation's economy, have all shown remarkable progress in the past months.

    Compared to the same period last year, investment in the country's fixed assets has increased by 25 percent during the first five months of the year.

    Investment in the real estate sector, a major component of fixed assets, grew by 39 percent in the first five months, 30 percentage points higher than during the same period last year.

    Investment in the housing market is growing at a fast clip, as indicated by the additional funds pouring into the sector as well as the rapid increase in new home starts and land transaction volumes.

    Many analysts worry that the curbs on realty purchases might impact negatively the nation's gross domestic product growth as well as the sector's revenues.

    The real impact on China's macroeconomic situation and GDP growth - due to the current regulatory tightening - will only be felt starting next year, since there is typically a 12-month lag before such curbs take effect.

    However, the government is likely to offset any likely fallout through some careful planning.

    One effective step will be to invest more in government-backed homes, which will thwart any lingering slump in domestic property sales.

    China's exports, the other key pillar of the national economy, showed a year-on-year growth rate of 48 percent in the first five months of 2010.

    Economic recovery in the US, Japan and other emerging markets, and structural adjustments and productivity gains in export-oriented units contributed to this robust growth momentum.

    Concern that the debt crisis in Europe is likely to choke China's exports in the coming months, thereby dampening GDP growth prospects, will also prove to be exaggerated.

    The crisis in Europe is certain to affect exports, but that should be limited in scope.

    The sovereign debt crisis has so far been confined to some small European nations and is therefore very different from the 2008 US financial crisis.

    Germany and France, the two leading economies in the European bloc, have not suffered much in the current crisis.

    The crisis in the US, on the other hand, had crippled the financial system of the world's largest economy. And, the economic slump soon spread to the rest of the world due to the predominantly dollar-dominated international financial system.

    China's domestic consumption has also kept pace with its export and investment boom, growing by 18 percent year-on-year in the first five months.

    In this scenario, the chief problem is not any likely failure in achieving the targeted growth rate, but that a speeding rate of growth may lead to economic overheating.

    Whether the realty sector will be slapped with a fresh round of macro-economic controls is also a big concern.

    China must not budge from the current regulatory curbs, given the fact that the property bubble has not only made homes unaffordable, but has also turned into a major risk for the financial system.

    If the government can resist vested interests and push forward the already effective curbs on the housing market then any likely impact from a housing bust can be minimized.

    Regarding the consumer price index (CPI), the country's central bank has enough ammunition to check its upward trajectory.

    Improved economic conditions at home and abroad will ease pressure on the CPI in the latter half of the year.

    To be sure, extant uncertainties are unlikely to scuttle the growth momentum of the Chinese economy.

    The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of

    Social Sciences

    (China Daily 06/28/2010 page9)

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