Hot Spots: China. (International Insight).(Brief Article)(Statistical Data Included)

The prospects for the economy remain good, better than those for any other country in the region. The government is being conservative with its forecast of real GDP growth on the order of 7.0 percent this year. Indications are that the expansion may well match the 7.3 percent reported for 2001, although the pace of advance will be less than that in the first half. Considering that export growth will be only moderate, domestic demand will have to pick up the slack, as it did last year, when retail sales rose by 10.0 percent compared to 2000. To bring this about, the authorities recently lowered interest rates (the benchmark consumer price index inched up by just 0.7 percent in 2001, suggesting that deflation is still a risk to be reckoned with), and they will add to the stimulus with fiscal deficit spending.

Every time there is talk of another round of such pump-priming, critics come out of the woodwork who insist that China is well on the way to finding itself struggling with the same ballooning of the public debt that has tripped up Japan and other Asian nations since the regional financial crisis of 1997. While China's budget deficit was less than 3 percent of GDP last year, and the generally acknowledged public debt (domestic and foreign) came to no more than 23 percent of GDP, the argument is that once the cost of rehabilitating the nation's banks is added as well as the PRC's implicit pension debt, public sector obligations are considerably more than 100 percent of GDP. There is no denying this.

Moreover, while China's four asset management companies (Orient, Cinda, Huarong and Great Wall) resolved 124.5 billion yuan (some USD 15 billion) in bad loans of state-owned banks in 2001, this was just a small part of the CNY 1.4 trillion in non-performing assets on the books of these institutions (the China Construction Bank, the Bank of China, the Industrial and Commercial Bank of China and the Agricultural Bank of China). It is widely believed that most of the NPLs will have to be written off eventually. In fact, a senior official at the China Construction Bank recommended recently that the "Big Four" state-owned banks not only transfer more bad loans to the debt clearing firms but also unneeded workers to slim down operations and become more internationally competitive.

While the results of past official policies as well as mismanagement and corruption in the state banking sector will take time and large amounts of money to clean up, however (even the generally well-regarded New York office of the Bank of China was recently fined USD 20 million for shady banking practices), the costs can be spread out and even the worst pessimists do not see the fiscal problems become really serious anytime in the next ten to fifteen years. So, if current trends persist and a problem is allowed to build up, this is a rather long-term consideration, not a near-term worry.

The foreign trade surplus narrowed in 2001 against the backdrop of the economic slump in North America and much of Asia, but it contracted less than most analysts had ...