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Commentary: China: Sticking To The Fast Lane


It was a shocker, all right. On Jan. 25 the Chinese government announced its latest economic growth figures. Turns out that the irrepressible Chinese economy grew at an astounding 9.5% annual rate in the fourth quarter of 2004, as well as for the whole year. That's the most vigorous growth since 1997, well above most economists' predictions. So much for Beijing's effort to damp down what many see as an out-of-control expansion that could lead to a hard landing and global recession. The surprising figure is certain to be a focus of the annual Group of Seven meeting scheduled for London on Feb. 4-5, with renewed demands from the U.S., Japan, and other developed nations that China revalue the yuan to curb exports, raise interest rates, or both.

Don't hold your breath. This may be hard for outsiders to believe, but the latest economic data include a lot of numbers that have Chinese officials congratulating themselves. The good news is that President Hu Jintao and Premier Wen Jiabao appear to be achieving a key policy goal: to wean the Chinese economy from heavy government spending and rely more on trade and domestic consumption for growth. "Investment is down, and consumption is surprisingly strong," says Jonathan Anderson, chief Asia economist for UBS Securities (UBS) in Hong Kong. "The authorities should be pretty happy."

The latest numbers show that while China still relies on government spending for about half its gross domestic product, the mix is beginning to change. For all of 2004, the growth in fixed-asset investment, much of which is government-driven, was 25.8%: That's much better than the 43% clip in last year's first quarter. And in a sign that government measures to cool overheated sectors are working, investment in ferrous metal -- that is, steel -- and nonferrous metal manufacturing dropped by 65.5% and 43.5%, respectively. Investment was up in agriculture, service sectors, energy, and transportation -- the last three in an effort to overcome the power shortages and road and port bottlenecks that plagued China in 2003. Industrial production overall grew at its slowest rate in a year. "The accelerated development in agriculture and the service industry was what the government wanted to see," said Li Deshui, commissioner of the National Bureau of Statistics, in announcing the new figures. "The internal vitality of the economy is strong."

Indeed, incomes were higher all over China. Grain production was up for the first time in five years, which helped to boost rural incomes by 6.8% last year. Urban incomes were up 7.7%. That explains a 13.3% rise in retail sales as Chinese buyers snapped up communication products like mobile phones, which posted a 41.7% rise in sales, and household appliances, up 13.7%. And while the passenger auto sector is in a slump, overall vehicle sales were 23.4% higher. "With the growth of private firms and reform of state enterprises, domestic consumption is becoming much more important," says Andy Rothman, China strategist at CLSA Asia-Pacific Markets in Shanghai.

Whatever the international concerns may be about such rapid growth, Beijing isn't likely to do anything that will still the beating heart of its economy -- exports. They were up 35.4% in 2004, providing tens of thousands of jobs for workers who are being let go from state-run enterprises. China is now the world's third-largest trading nation, and that is just fine with Beijing. "China is seeking stability at a high level of growth," says Rothman, "not a slowdown this year."

But Beijing wants that growth without inflation, and there was good news there, too. Prices rose 3.9% for the year but the climb has been steadily easing since last summer. Price rises were led by increases in grain prices, up 26.4%, and meat and poultry prices, up 17.6%. Yet Bear, Stearns & Co. (BSC) estimates that core inflation, excluding food and energy, came in at just 0.9%, hardly high enough to justify a hike in interest rates.

So it looks like those G7 critics will have to live with more of the same in 2005: administrative measures to control new investment in hot sectors as well as continued limits on bank lending. A small revaluation of the currency and a tiny interest-rate rise are also possible. But other than that, don't expect any sudden shifts. China may be seeing sizzling growth, but it's not too hot for Beijing.

By Dexter Roberts


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