Hot Spots: China.(Brief Article)

The PRC is already a key overseas sales territory for the US. It will undoubtedly become ever more important in the wake of the bilateral 1999 trade pact between Beijing and Washington, which commits China to open a wide range of markets in return for the US Congress' granting permanent normal trade relations, and the PRC's entry into the WTO, which--despite new delays in negotiations over agricultural subsidies--will occur sometime this year. The economy is reported to have grown, in real terms, by an impressive 8.0 percent last year. GDP was equivalent to 1.07 trillion USD--the first time that annual output has broken the 1 trillion USD barrier. The authorities now confidently predict that the 2001 rate of increase will match last year's. We feel that a word of caution is in order.

Consumer spending remains relatively soft. We do not anticipate a real and sustained increase in household demand until blue- and white-collar workers lose the sense of job insecurity that reforms and plant closings have given them and income growth improves for the country's 800 million rural residents. This growth was only about 2 percent last year, compared with 7 percent in the cities. Moreover, while many (more than 4,000) of the big state industries have been restructured and are now making money, they have been helped by a government-sponsored, one-off, debt relief program that took a cool 170 billion USD in obligations off their books. Most continue to suffer from over-staffing, are plagued by poor management, and are ill-prepared to face the intensified competition that will come with China's WTO entry and the consequent shrinkage of import tariffs.

In other words, in 2000, as in previous years, burgeoning exports and generous government spending on all sorts of infrastructure projects were the main forces that kept the economy humming. Export growth, however, slowed markedly, from a year-on-year peak of 45.0 percent in June and a full 2000 average of 27.8 percent, to 8.5 percent in December, as demand in the Asian region and, importantly, in North America slackened. Even so, China reported a foreign trade surplus of 24.1 billion USD for last year, but this was down from 29.1 billion USD in 1999 and was the smallest black entry in five years. We suspect that the surplus will contract further in 2001 as China begins to slash import duties.

None of this implies that the country's external accounts are headed for difficult times. China earned 16.23 billion USD in foreign exchange from tourism last year and aims, realistically, to reap 18 billion USD in 2001. The PRC has clearly shaken off the impact of the Asian economic crisis, which prompted investors to flee the entire region, and foreign companies are now pouring capital into China in anticipation of its WTO membership. Cumulative actual foreign investment is already up to a most impressive 350 billion USD, and contracted investment totals 677 billion USD. Official international monetary reserves stood at 165.5 billion USD at the end of ...