x Abu Dhabi, UAESunday 21 January 2018

China on an economic knife-edge

A year of rapid growth has elevated China's economy to the world's second-biggest, but with the nation fighting property and inflation battles, as well as being embroiled in international currency wars, a crucial period looms.

In spite of efforts to control the rapid rise of property prices, China remains at risk of a bubble until the fundamental dynamics of the market are changed, economists say.
In spite of efforts to control the rapid rise of property prices, China remains at risk of a bubble until the fundamental dynamics of the market are changed, economists say.

Economic analysts in China might be forgiven for wishing things would calm down a little, just to allow them to pause for breath.

Yet with 2010 having delivered another year of rapid economic growth, with property prices continuing to rise at what some fear are unsustainable levels, and inflation becoming a major concern, there is little sign of a slowdown.

In the second quarter, China overtook Japan to become the second-largest economy in the world, a symbolic milestone even if per capita incomes in China are only about one tenth of those in Japan. For all such achievements, this year has been characterised by signs of overheating that will continue into next year.

The property market's rampant growth in the months up until April caused the government to make it much harder for people to get loans for third homes.

In some major cities such as Beijing and Shanghai, these measures, along with fears of a property tax, paralysed the market, cutting transaction volumes amid concerns that an unsustainable bubble was being formed.

This month, with prices continuing to rise, the ministry of land and resources took further action to ensure supplies of low-cost housing, at the expense of high-end developments.

In another sign of overheating, the labour market suffered a summer of discontent, with a wave of strikes by newly emboldened workers who recognised that a labour shortage, particularly in the southern manufacturing belt, meant they could demand higher wages.

Many provinces substantially raised minimum monthly wages. Henan increased them by one third to 600 yuan (Dh332.48), while the capital brought in a 20 per cent rise to 960 yuan.

Against this backdrop, it is perhaps no surprise that inflation has become the burning issue in the Chinese economy.

The most recent figures, last month's, show the consumer price index (CPI) hitting 5.1 per cent, its highest level for 28 months. Food prices were up 11.7 per cent from the same period last year.

Just as it acted to control the runaway property market, the government has moved to curb food inflation by trying to increase agricultural production and dampen speculation in commodities. It also raised interest rates on Christmas Day.

Bank reserve requirements have also been increased six times this year to 18.5 per cent and, last week, Lu Zhengwei, the chief economist at Industrial Bank, said the figure could increase to as much as 23 per cent next year. With the country poised to exceed its 7.5 trillion yuan target of new loans this year, a vivid sign of what some see as the excessive liquidity in the market, will the increased bank reserve requirement be enough to prevent things overheating next year?

Professor Frank Song, of the school of economics and finance at the University of Hong Kong, concedes "it's difficult to control inflation", with prices being pushed up by a range of factors including rising wages and tougher environmental controls that increase costs for companies.

Prof Song says the control of property prices is more achievable.

"I think the government is serious about controlling real-estate prices," he says. "In addition to the policies they carried out in the past, the government will continue to move on with new controls, so there's unlikely to [be] a great increase in real-estate prices. Given the inflationary environment, I think a lot of people will choose to invest in real estate as an inflation hedge."

The trajectory of the property market next year very much depends on location, believes Li Wei, an economist based in Shanghai for Standard Chartered.

In most of the "first-tier" cities, he says, prices will continue to rise, while some of the "second-tier" cities may show a decline. Predictions are difficult, and in some areas prices may rise or fall by up to 10 per cent.

"It depends on how tough the government gets with the housing market," Mr Li says.

An overall tightening up of money supply will dampen economic growth slightly to about 8 per cent or 9 per cent, Prof Song says, compared with 9.6 per cent in the third quarter of this year.

After repeated complaints from western economies, particularly the US, over China's exchange-rate policy, Prof Song expects the yuan to appreciate 4 to 5 per cent next year. The yuan has climbed by about 2 per cent since September, when the People's Bank of China loosened controls.

Some remain concerned that the authorities may not be doing enough to prevent overheating.

"They can crack down all they want [but] unless they do something to change the fundamental dynamics of the market which cause people to pour money into property, it's going to continue," says Patrick Chovanec, an associate professor of practice in the school of economics and management at Tsinghua University in Beijing.

"The same with inflation. They've implemented price controls without addressing the underlying issue, which is the expansion of the money supply. Inflationary pressure on both prices for property and the CPI are likely to continue next year unless something is done to change that," he says.

Such is the sensitivity of the inflation issue that only yesterday the premier, Wen Jiabao, tried to offer reassurance. "I can tell everybody, the government has complete confidence in tiding over this difficult stage together with the masses," he said on Chinese radio.

He also acknowledged concerns over rising house prices, insisting the authorities would work to limit increases.

"I believe after a period of efforts, housing prices will be back to reasonable levels. I have such confidence," he said.

While Mr Chovanec says the central bank understands what is required, it faces opposition from other sections of the bureaucracy that offer "a huge amount of resistance to dealing with these things".

He predicts there will be further minor appreciation of the yuan, with a temporary dip in inflation and a "continued bubble in property".

"If they do act, they can get these things under control," he says. "If they don't, if they continue, they could really spin out of control."