There are some signs that China's economy is
overheating, but the most likely scenario is for a "soft landing" via a
gradual cooling of growth rates, the Organization for Economic
Cooperation and Development said Tuesday in its latest Economic Outlook
report.
It cited some overheating symptoms such as the acceleration of
investment (which represents an unusually high share of GDP and was
already booming), energy input shortages and overcapacity in several
industrial sectors.
But at the same time the report stressed that measures have been
taken to slow credit growth, in particular via a hike in banks' required
reserve ratio and restrictions on real estate lending.
"In the short run, the most likely scenario is for a soft landing,"
the OECD said.
The OECD's central projection is for a "marginal" easing in growth
rates from last year's 9.1%. The OECD sees China GDP at 8.3% in 2004 and
7.8% in 2005.
Over the longer run, China's contribution to the global expansion
hinges on how successfully it continues to reform. Potential output
growth may be of the order of 7% to 8%, but only provided that progress
continues on the structural front, in particular restructuring of the
bloated state-owned enterprises and banks, and strengthening of social
safety nets.
The institution said it was unlikely that there would be a change
in the country's exchange rate peg to the U.S. dollar "for the time
being."
While China's dynamism has in part been base down domestic demand,
fixed investment fuelled by government infrastructure spending, rapid
credit expansion, a property market boom and expansionary fiscal policy.
But China's take-off also reflects a catch-up process made possible
by the opening-up and liberalisation of the economy, including accession
to the World Trade Organisation in 2001. The OECD said as much as one
third of China's 9% trend growth rate since the late 1970s reflects
reform-induced multifactor productivity gains, even if the contribution
of the latter has apparently tended to diminish over time.
In the process, China has become the third largest trading nation
in the world, on par with Japan.
Given that China imports mostly from other Asian countries, its
direct contribution to growth is largest in that region. In the case of
Japan, exports to China accounted for some two thirds of the increase in
exports in 2003, with sales of capital goods and parts and IT-related
products rising fastest and representing close to two thirds of total
exports to China.
The strong growth of Chinese imports also provided a significant
boost to exports from Korea and Australia, as well as many of the
smaller Asian economies and the United States.
China also contributes to global growth via terms-of-trade effects,
enabling firms in OECD countries to reduce costs and increasing their
competitiveness and profitability.
"The relatively limited downward amplitude of the present cycle is
partly related to the buoyancy of economic activity in Asia, and
especially China, early in the recovery," the OECD said.
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