From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Thu Jul 20 2006 - 01:48:10 EDT
NY Times July 19, 2006 China´s Surge Raises Fears of Runaway Economy By DAVID BARBOZA SHANGHAI, July 18 - The world´s largest economies aim to grow by 3 or 4 percent; 5 percent is impressive; 7 percent remarkable; and 10 percent, usually unthinkable. But Tuesday, China said that its economy grew 11.3 percent last quarter, the fastest pace of growth in about a dozen years, raising fears of a runaway economy that ends in a hard landing and making the strongest case yet for lifting the value of its currency. Fueled by soaring exports, robust consumer spending and huge investments in factories, malls, expressways and real estate, China´s economy is growing almost as fast as it did in its peak years of growth, in the early 1990´s, when the economy was much smaller. And that is worrying government bureaucrats, economists and analysts who see inherent risks of inflation and overheating when an economy blows off this much steam. "This is out of control," said Andy Xie, an analyst at Morgan Stanley in Hong Kong. "The bottom line is lending is crazy even after repeated warnings from the government." The aggressive growth is likely to put more pressure on the Chinese government to rein in overzealous investment. Analysts say the gains could also prompt stronger calls for China to allow its currency, the yuan, to further appreciate against other currencies to reflect more fully the country´s growing economic power and perhaps help tame its growing trade surplus. But few analysts seem to be betting against a bull run in the world´s most dynamic economy. Indeed, economists were divided on the figures, with some arguing that there were troubling signs below the surface, suggesting that growth may actually have been even stronger and others saying that there were few signs of inflationary pressure. "Maybe this is a new economy," said Stephen Green, an economist at Standard Chartered Bank. "Maybe China can grow fast without inflation." Mindful of the dangers of a sizzling economy, officials in Beijing have regularly tried to talk down the markets and warn of punitive action to rein in irrational investments. Indeed, they announced administrative measures recently that limit foreign ownership in property. The growth spurts here are all the more remarkable, coming after two decades of huge economic gains. No major economy has grown much faster than 5 percent in the last 30 years. Even in the bubble era of the late 1980´s, Japan´s growth rate was closer to 4 percent. So far, though, Chinahas navigated well enough to avoid major downturns - although it has had miniature busts and government-engineered slowdowns - and has been able to register record after record. Last week, for instance, China said that its monthly trade surplus reached a record $14.5 billion in June, putting the country on track to surpass last year´s record $100 billion annual trade surplus. That announcement came just weeks after China said that in February its foreign exchange reserves reached $853.7 billion, overtaking Japan as the world´s largest holder of such reserves. Analysts then started projecting that China was on track to reach the $1 trillion mark by the end of the year. Earlier this week, China reported reserves of about $941 billion at the end of June. The figures are significant, economists say, because China is now a large holder of American dollars, and its central bank can potentially exert some influence on the direction of United States interest rates and the ability of Americans to continue borrowing cheaply. "With very little doubt, China is going to have the world´s biggest current account surplus this year," said Nicholas R. Lardy, a senior fellow at the Institute for International Economics in Washington. "They could reach $240 billion. And it means they are going to be lending much of that money to the rest of the world." Last year, China´s economic growth rushed past Italy, overtook France, and then inched past Britain to become the world´s fourth-largest economy with $2.3 trillion, trailing only Germany, Japan and the United States. Part of that sudden leap came after China reported a new economic census that led to a decade´s worth of economic revisions because of growth figures hidden from or overlooked by government bureaucrats. Economists say they now expect the government to take new steps to rein in the economy, like raising interest rates and putting new controls on lending and investment. Still, many say they expect moderation, rather than a hard landing. In fact, tightening measures were announced earlier in the year, but the economy grew by 11.3 percent in the second quarter after a hot first quarter, with growth of 10.3 percent. For the first half, the government said the economy expanded by 10.9 percent. But several economists said they doubted the government would move to appreciate the currency, which has been a contentious issue with the United States and the European Union because of China´s soaring trade surplus. "I don´t think the government is prepared to sharply appreciate the exchange rate," said Ha Jiming, chief economist in Beijing at the China International Capital Corporation. "I think probably 3 to 5 percent a year, that will last." Many other economists, however, say pressure is building for China to make another move on the currency and that is fueling huge inflows of foreign capital. Of course, most economists also predicted that growth would moderate in the second half of the year, which would seem to be obvious, since few economists would ever predict that an economy would grow by 14 percent. "They grew at 14 percent in 1992," said Mr. Lardy at the Institute for International Economics. "And many people thought they were actually growing much faster than that."
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