主题：【文摘】China's `Long Landing' Looks Deceptively Soft -- 西风陶陶

Andy Mukherjee is a columnist for Bloomberg News. The opinions expressed are his own.

China's `Long Landing' Looks Deceptively Soft: Andy Mukherjee

Jan. 13 (Bloomberg) -- It may look and feel like a soft landing, though the recent slowdown in China's economic growth is probably a hard knock packaged in easy installments.

A deceleration in gross domestic product growth during the first three quarters of 2004, combined with a slowdown in industrial production and a drop in inflation in November, have convinced many that the world's fastest-growing major economy has either already landed without a jolt, or it will this year.

Those who harbor that belief rule out further policy action. Why should China raise interest rates, or allow its currency to rise, when inflation is only 2.8 percent, far below the 5 percent danger mark, and economic growth is projected to slow to between 8.5 percent and 9 percent, from an estimated 9.2 percent in 2004?

This line of reasoning mistakenly believes that no evidence of a hard landing means a soft touchdown when in reality the Chinese economy is yet to begin its descent. As to what will happen when it does land, researchers Morris Goldstein and Nicholas Lardy at the Institute for International Economics in Washington make a strong case for a ``long landing,'' which is a hard bounce that stretches over a long time so it looks soft.

In this scenario, GDP growth will gradually decline by about 5 percentage points over several years, and even then with the help of ``adjustments in the renminbi exchange rate and more meaningful adjustments in interest rates that we have seen to date,'' the researchers say in a recent paper.

Jury's Still Out

One of the myths surrounding a soft-landing scenario in China is that the overheated industries such as steel, cement and property can cool down even as headline GDP growth remains intact, cushioned by a surge in private consumption or exports.

Goldstein and Lardy say that isn't likely to happen because investment and consumption in China move in the same direction. So, as the investment bubble unwinds, its impact will curb GDP growth. Moreover, the threat of a protectionist backlash from the U.S. will make China nervous about adding to its record-high trade surplus of $11 billion in December.

``The jury,'' says Anne Krueger, first deputy managing director of the International Monetary Fund, ``is still out --it's too soon to be confident that the much talked-about soft landing has, as yet, been successfully engineered.''

China's $1.4 trillion economy probably grew faster in 2004 than in 2003, even as the government and the central bank tried to cool it first by making banks curb credit, and then by raising the benchmark-lending rate by 27 basis points to 5.58 percent.

Hot Money

``On energy consumption, property investment, and trade data, I believe that the economy grew faster last year than in 2003,'' says Morgan Stanley Chief Asia economist Andy Xie. ``As a result, China is facing the same challenges now as it did one year ago, except that the investment excess is greater.''

For China to try to solve its over-investment problem solely by raising interest rates more aggressively than the token increase in October is risky because it may actually worsen the intolerable surge of speculative capital inflows into China.

An unconfirmed estimate, reported by the Asian Wall Street Journal, shows China's foreign reserves rose by a record $200 billion last year. Dong Tao, an economist at Credit Suisse First Boston in Hong Kong, says $96 billion, or about half the increase in reserves, was because of ``hot money'' inflows, which beat China's capital controls and came into the country via ``suitcase smuggling to underreporting/over-reporting exports/imports.''

Relying on Greenspan's Kindness

Unless the authorities in Beijing end the yuan's decade-old peg to the dollar, Federal Reserve Chairman Alan Greenspan is the only one who can guide the Chinese economy to a soft landing by raising U.S. interest rates and making hot money leave China.

It might not be in China's best interest on rely on Greenspan's kindness because the $96 billion hot-money inflow last year coincided with the Fed's target rate for overnight loans between banks more than doubling to 2.25 percent. So a federal funds rate of 3.5 percent by end-2005 -- the median estimate of economists in a Bloomberg poll -- may not be enough to pull speculative capital out of China. Only a decisive appreciation in the value of the Chinese currency can do that.

Peg and Property

In fact, Shanghai's property prices, driven to frenzied levels by overseas speculators, are a good example both of just how big the over-investment problem is and just how compromised China's monetary policy has become in dealing with it.

The price of an 80 square-meter house is 27.5 times annual disposable income of an average household in Shanghai, according to a study by the Chinese Academy of Social Sciences, reported in a paper by Kwan Chi Hung, a senior fellow at the Research Institute of Economy, Trade and Industry in Japan. The ratio compares with 10.3 in the U.K., and 6.4 in the U.S, Kwan says.

``It's simply a matter of time,'' says CSFB's Tao, ``before China adjusts its exchange rate regime, as such a large country is unlikely to surrender its monetary policy to the U.S. Fed.''

To contact the writer of this column:

Andy Mukherjee in Singapore at [email protected].

To contact the editor responsible for this column:

Bill Ahearn at [email protected].

Last Updated: January 12, 2005 16:13 EST