China leads revival

THE regional economic recovery is turning into a tale of two Asias.

The growth engines of countries such as Indonesia, Thailand and the Philippines have begun to splutter. Foreign investors are being drawn by the allure of the economies of China, Hong Kong and South Korea. Japan remains the wild card.

China will top the 2000 growth league table. At the half way stage the value of the goods and services produced by its 1.2 billion people was US$475.8 billion – 8.2 per cent up on the comparable period last year, putting China on track to be a trillion dollar economy by the end of the year.

Exports were up 38 per cent year-on-year, outpacing imports by a wide margin, to produce a trade surplus of more than US$12 billion.

More importantly, the shackles of deflation that have gripped the country for the past three years are beginning to loosen. The PRC authorities had tried everything, short of locking people in department stores, to stoke up consumer demand that the economy so badly needs.

The often brutal reform process has thrown tens of millions of people out of work. Those that do have a job, worry about the rising costs of education, medical care and housing, as the cosy welfare state blanket is largely stripped away.

Now some shoppers are cautiously coming back to the stores. Retail sales are running 10 per cent up and consumer prices are edging higher. The government is working on policies to further boost sales of cars and motorcycles, housing, telecommunications, information services and tourism. There has been a sharp jump in domestic air travel, and personal computers are walking off the shelves in comparatively rich cities like Shanghai.

A revival of consumerism in China is crucial for three reasons.

It means the economy would be less dependent on fiscal spending by the government, which has been pumping hundreds of billions into infrastructure projects.

It would help mobilise some of the gigantic sums of money lying around in savings deposits, and it would open up new revenue avenues. China’s tax collections are unusually low, only 12 per cent of GDP, less than half that of other emerging market economies.

There are tentative plans for a sort of super GST with taxes of up to 20 per cent levied on bills at restaurants, nightclubs, karaoke bars, massage parlours and other entertainment establishments. Luxury goods like wines, cosmetics and jewellery would be taxed higher, and a 20 per cent levy on electronic games is proposed.

The government has been encouraging the development of its stock markets, in order to float more state-owned enterprises (SOEs) off to the public as part of the long reform struggle.

The stock exchanges of Shenzhen and Shanghai, launched only 10 years ago, now boast nearly a thousand company listings. Share prices of the “A” stock held by domestic investors have climbed more than 40 per cent in the past year, ranking them among the best performing markets in the world.

The “B” shares reserved for foreigners have fared less well. Overseas investors have preferred to get their exposure to one fifth of the world population through China companies listed on the big liquid Hong Kong bourse.

There is talk of merging the two domestic stock exchanges and scrapping the distinction between “A” and “B” shares, which could well open up the market to an influx of foreign funds.

China is on a roll. But, ratings agency Moody’s has warned that time is running out for Beijing to overhaul the creaking old economy, and to fend off unrest from those who have seen precious little benefit from reform, particularly in the rural areas.

Moody’s was critical of the parlous condition of PRC banks – by some estimates more than 30 per cent of loans made to state companies are non-performing, and likely to stay that way.

Last week, the minister of the Development Planning Commission, Zeng Peiyan, boasted that more that 3,600 of China’s 6,500 money haemorrhaging SOEs were now out of the red and making profits.

That sounds like rather a selective list. It is hard to believe that the balance of the near 300,000 state-owned entities are in the black.

Industrial production in August is expected to maintain the 12 per cent growth rate recorded so far year. That is likely to be the high point. Any pull back in US demand would impact quickly on exports.

Within months, China will be a member of the World Trade Organisation. Initially, that will result in a significant increase in imports and erosion of the trade balance.

Foreign competition will hurt many Chinese companies, increase bankruptcies, and swell the unemployment pool. Further out, WTO membership is expected to underwrite China’s undoubted prospects of being the powerhouse of the region. That would be considerably to the benefit of Australia in general, and WA in particular.

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