China set to scale new heights

LAST year China became a trillion dollar economy, and landed the quinella of record export volume and boosted consumer spending at home.

The Chinese Year of the Snake is about to begin.

The vast country may prove Asia’s best defence against the global economic slowdown now slithering over the horizon.

China’s export engine fired on all cylinders in 2000 racing up 28 per cent to US$248 billion. More importantly, imports climbed 36 per cent to US$225 billion, led by purchases of electrical products and machinery and new technology goods.

A quarter of all imports came from struggling Japan.

China was not immune to the spike in oil prices and had to buy in 70 million tons of crude with the cost doubling to US$15 billion.

Domestic growth was powered by the long-awaited upturn in consumer spending, which rose at a double digit pace, despite massive job losses from the continuing reform of state-owned enterprises (SOEs).

The catalyst that brought shoppers back to stores was a sustained boom on the stock markets of Shenzhen and Shanghai.

China has an estimated 58 million private investors.

The wealth effect stemming from a 56 per cent jump in “A” share prices stimulated sales of cars, motor bikes and scooters, mobile phones, computer and household goods as well as tourism.

The “B” shares restricted to foreign investors zoomed 135 per cent.

The enthusiasm was driven by government plans to scrap the distinction between the two classes of shares and merge the two national stock exchanges under one roof in Shanghai.

Only a decade ago, China’s stock markets were a joke.

When the first company IPOs came on in Shenzhen, the police had to fire tear gas to break up the crowds.

Today there are over a thousand listed companies and the market provides a convenient avenue to float off the better credentialled of the SOEs.

Some of the funds raised are earmarked for a national welfare fund to cushion the blow for millions of workers sacked, and to fend off any consequent civil unrest.

The renminbi is not convertible on the current account and the stock market generally ignores the gyrations on US markets and the histrionics of fund managers.

The currency is convertible on the capital account though, and exports will be adversely affected by weaker global demand for goods.

The question is by how much?

Probably enough to see the 2000 trade surplus of US$24.8 billion sharply reduced or melting away entirely.

That would not be a disaster, provided the domestic economy holds up.

Exports account for less that 20 per cent of GDP.

China is likely to lose export market share to regional rivals as the yen and other currencies continue to weaken, even against a wilting greenback.

Western market economists have been wrongly predicting a devaluation of the renminbi for three years.

Given their record, it could happen this year.

However, Beijing has shown a very good understanding that the move would trigger a beggar your neighbour round of competitive devaluations and benefit nobody.

This is also the year that China will join the WTO.

Initially at least, that will boost the import bills as tariffs are slashed and China’s markets open up. It is going to be a difficult period.

The headache of reforming the parlous banking system, where 30 per cent of loans to state companies are still non-performing will linger for a long time.

Industrial production numbers for December out this week were higher than expected showing growth of 10.4 per cent and reflecting the fact that the economy is going into the new year with plenty of momentum.

China has a good shot of hanging on to GDP growth of 7.5 per cent.

No other Asian country will come even close to that.