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China builds 'growth engine' role
By Geoff Hiscock
HONG KONG, China (CNN) -- China is rapidly consolidating its status as Asia's key growth engine next year as economists point to the impact its demand for capital, goods and services is having on its neighbors. Jim Walker, global chief economist for CLSA, is the latest regional analyst to cite China's importance to the region at a time when Japan, Europe and the United States are all in the doldrums. Walker told CNN in Hong Kong on Tuesday that he expects China's growth to accelerate next year as its private sector moves more to the fore. He said the big factor in China's growth was the emergence of private property rights from 1999 onwards, as part of President Jiang Zemin's further opening up of the economy. Allowing people to borrow against property had "enlivened" private capital in China, he said. China's State Statistical Bureau estimates growth this year to be 7.8 percent, with strong exports, rising overseas investment and consumer demand driving the expanding economy. (Full story) It expects a similar rate in 2003. Strong marketThe World Bank earlier this month said in its 2003 global outlook that continued strong growth of at least 7 percent in China next year would provide a "strong market" for intra-regional exports from the rest of Asia. (Full story) ING Asia chief economist Tim Condon is opting for 7.5 percent for China in 2003, IMA Asia has a more bullish forecast of 7.9 percent and Morgan Stanley's Hong Kong-based regional analyst Andy Xie is predicting 7.2 percent. All of them point to China's key role in replacing the United States and Japan as the number one export destination for many of Asia's producers. And while some critics have blamed China's low-cost output for having a deflationary effect on the rest of the world, Walker and other commentators say this is being balanced by its growth impact. "China is not exporting deflation, it is exporting domestic growth," he told CNN. IFR's Asia Pacific chief economist George Worthington noted in a commentary earlier this week that this "growth effect" more than outweighed the deflationary impact of its low-priced goods. This, he said, had been "far less damaging to the regional and global economy than Japan's persistent deflationary conditions". Investment favoriteWalker said China's ability to draw in overseas direct investment at the expense of other Asian destinations was a "big issue" for Southeast Asia. But he said the rest of Asia was getting back the missing investment in the form of China becoming a bigger market for exports of their goods and services. China drew in $40 billion of overseas direct investment in the first nine months of 2002, up 22.6 percent on 2001, and is by far the favorite destination in Asia today for investors. AFR's Worthington has no doubt this trend will continue, noting that about a quarter of all white goods are now made in China. It is also becoming the manufacturing 'back office' for high-cost countries like Japan. Global automakers such as GM, VW, Toyota, Honda and Hyundai already are making passenger cars in China, both for export and for a domestic market that is tipped to exceed 1 million units this year. (Full story) Like CLSA's Walker, Xie of Morgan Stanley believes that East Asian economies have learned to work with China, rather than compete against it. They are supplying components to China's export machine and meeting Chinese domestic demand that would otherwise be unmet. Banking problems
"China competitiveness is generating a positive sum game in the region for now," Xie said in his 2003 outlook. Amid this generally bullish outlook for China, economists point to massive bad-loan problems in its banking system and the social strains caused by a rising jobless rate, particularly in China's less-developed western regions. China is looking to address some of this imbalance by undertaking a massive rail-building program to physically and economically link the inner regions with the more prosperous east coast. (Full story) Walker thinks that as the Chinese state sector shrinks, the private sector is scrambling to absorb some of these employees. "So far, so good. But it is still a race against time in China," Walker told CNN. The reform of China's financial system was one of the major challenges pointed to in a new study by the Australian government released late last month. (Full story) The study said China's $1.2 trillion economy was likely to grow at 7 percent a year for the rest of the decade. But it warned that continued high growth is "not inevitable", citing potential social, economic and political problems. The report said of particular concern was the mountain of bad debt held by China's big banks and asset-management corporations. By some estimates this could be as high as $720 billion, and could require a $320 billion government rescue package. CLSA's Walker said he believed the big state-owned banks would change slowly, with the problem becoming acute in 2005. In the meantime, China was trying to grow the country's smaller banks to lessen the impact.
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