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Friday, July 16, 1999 Published at 12:45 GMT 13:45 UK


Business: The Economy

China's economy slowing down

China wants its citizens to spend more instead of saving

China has reported economic growth for the first half of the year of 7.6%.

By most countries' standards, that seems an impressive performance. But with second quarter growth estimated at 7.1%, compared with 8.3% in the first quarter, it represents a serious slowdown.

So much so that the Chinese Premier, Zhu Rongji, has ordered provincial leaders to step up their efforts to stimulate the economy.


[ image: Premier Zhu Rongji is calling for efforts to stimulate the economy]
Premier Zhu Rongji is calling for efforts to stimulate the economy
However, there are signs that the traditional method of stimulation - hand-over-fist government spending - might not be enough.

Latest figures show that the fixed state investment which has been buoying the economy rose by only 12.1% in the second quarter, compared with 22% in the first three months.

That decline was reflected practically across the board. Exports fell 4.6%, direct foreign investment was down by 9.2%, and retail sales showed only a sluggish 6.4% increase.

"There are almost no encouraging signs for the economy in the second half," said Song Guoqing, chief economist at the China Securities Exchange Executive Council.

"There should be some stimulus measures and it won't help to come in just drizzles - there should be a rainstorm."

Stimulating foreign investment

An umbrella is unlikely to be needed for the proposals announced on Friday - the easing of exchange restrictions aimed at encouraging foreign investment.

But Zhu Rongji has more tricks up his sleeve, according to the official Financial News. He told provincial governors he wants to raise spending on infrastructure and technological upgrades while trying to raise incomes, boost housing demand and stimulate exports.

It will be a difficult task. Consumer demand is so weak that prices have been falling for 18 months.

The Chinese are notoriously thrifty, saving an average 40% of their income. To get them spending, the government has cut interest rates on savings accounts and started to promote consumer credit.

Home owners

In an effort to boost consumer loans, people are being encouraged to buy the homes they have traditionally rented, and there is even talk of wage increases.

But that might not be enough in a country where wage insecurity and rising unemployment put a brake on spending.

"Even with a pay hike, after deducting the amount for higher rents households have to pay, it would translate to not more than a better meal at the weekend," says Gilbert Choy, chief economist at Dresdner Kleinwort Benson.

An unprecedented issue of bonds worth $12bn helped fund the spending spree that stimulated the economy in 1998. Another $7.2bn in special bonds will be issued this year.

But the relentless spending is increasingly seen as a sign of a government running out of ideas.

"All the conventional policy measures have proved ineffective," according to Daryl Ho, of Jardine Fleming in Hong Kong.

He believes attempts to reform the state by cutting jobs and reducing social benefits does not sit easily with a policy of growth.

"If I were the government, I would prefer to spend money on social security debt. Reforms are painful - they should try to keep the people content," said Mr Ho.

Gilbert Choy at Dresdner Kleinwort Benson agrees. "They need to monetise their fiscal liabilities and use the money to fund social security, education and medicare systems.

"If they can finance those, people would no longer think they have to save so much money and would start spending," he said.

Devaluation option

Another option to boost the economy would be the devaluation of tthe Chinese currency, the yuan.

China has maintained the yuan at a fixed rate against the dollar, despite the Asian crisis, but its exports are now less competitive than those of some other Asian countries.

Recent comments have suggested that China may be reconsidering its policy. Dai Xianglong, the central bank governor, said that the currency's value should be determined by supply and demand, or the balance of payments -implying that a deteriorating balance of payments could lead to devaluation in the future.

And an economist from China's development bank, Gao Jian, has gone further and urged an exchange rate adjustment "at the appropriate time" to boost exports.

China's trade surplus fell 64.5% in the first half of the year to $8bn, demonstrating the cost of maintaining the value of its currency.



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