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ASIA FOCUS : CHINA KNOWLEDGE
GRACE TIAN
When the Olympic flame atop the stadium was extinguished on Sunday night, Chinese people's dream of decades had finally been realised. The great success of the event boosted the global image of the country and bolstered national confidence as well.
However, in the post-Olympic era, whether the Olympic glory will expand to the country's economic field has started to arouse people's interest.
Unfortunately, though China has seen a satisfactory result in branding itself through the Olympics, it seems the macroeconomic consequences of the grand event are negligible. Now that people's attention has shifted away from the Games, China may be faced with many crucial economic issues that deepen people's concerns about the economic prospects of the emerging country.
China's gross domestic product (GDP) grew 10.1% year-on-year in the second quarter 2008, following a 10.6% rate in first quarter, which shows a slowdown in economic momentum that has been going on for four consecutive quarters. It also provides some clues to the Chinese government that the country's near-term challenge lies in sustaining growth rather than fighting inflation, which was already on the way down.
Among the three driving forces, net exports used to be an important booster to China's economic growth, contributing 2.7 percentage points to 2007 GDP growth. However, China's export-led growth model is now in trouble amid the current global economic down cycle.
China's major trading partners, the EU and the US, both see weakening demand in their domestic markets. In the first seven months, China's trade surplus to the EU increased 24.9% to US$86.9 billion, which is 29 percentage points lower than the growth seen in the same period in 2007. Meanwhile, the trade surplus with the US rose 3.8% to $91.7 billion, and the increase was 15 percentage points lower than a year earlier. This downturn trend is expected to continue for the rest of the year.
Meanwhile, the deceleration in export growth has spread pain to domestic industrial enterprises, especially SMEs, which provide tens of millions of jobs to Chinese citizens. In July, industrial output slowed to a 17-month low of 14.7%, as weaker export orders hit factory production across the country, according to statistics from the National Bureau of Statistics.
China's producer prices index (PPI) surged 10% year-on-year in July, the fastest pace since 1996. Facing such high raw material costs, Chinese producers may find it hard to pass on the increased expenses to foreign buyers in the near term, as there is fierce price competition among themselves in the global market.
Besides the sluggish external demand and rising production costs, Chinese manufacturers' profits are being further squeezed by the tight credit control measures, power shortage and currency appreciation. As a result, these enterprises, especially the SMEs, are struggling to maintain operations, and many are even closing down.
The bankruptcies of these SMEs generate social problems that are just as worrisome as high inflation, given the fact that SMEs provide 75% of urban employment opportunities, contribute 60% to the GDP, and occupy 69% of foreign trade.
Official statistics show that about 67,000 SMEs have already closed down in the first half. The labour-intensive textile sector has been most severely affected, with more than 10,000 companies shutting down, according to the National Development and Reform Commission.
Latest official statistics show that China's unemployment rate reached 5.5% in May, a record high for the past three years.
The Chinese government has felt the heat. Since July, Beijing has implemented a series of measures to stimulate export growth. China raised tax rebates on exports of textiles and garments to 13% from 11% from Aug 1, to help manufacturers afflicted by rising labour and raw-material costs.
Early this month, the People's Bank of China (PBOC) increased commercial banks' lending quotas for 2008 by 5% (for national banks) to 10% (for regional banks) in excess of their combined initial quota of RMB 3.7 trillion to help ease SMEs' liquidity problems.
The central bank also has kept interest rates unchanged at a decade-high this year, in a bid to halt gains by the yuan. The pace of RMB appreciation is expected to slow in the second half.
The moves, on the surface, are intended to help exporters and SMEs cope with financial difficulties. However, the real intention of the government is to solve the unemployment problem, which may incur further social problems. After all, maintaining social stability is always the top priority for Chinese leaders.
The year 2008, the 30th anniversary of China's opening-up, is a very crucial year for the country. How Hu and Wen will lead the Chinese government to solve the employment problem or SME dilemma would be vital to the country's sustainable economic development. While the past five years might have been a golden time for China, there may be more stern challenges ahead and people should fasten their seatbelts for a possibly bumpy ride.
The contributor is the Research Director and Managing Consultant with China Knowledge Consulting. The firm provides corporate services, financial advisory, marketing strategy and recruitment to foreign businesses seeking business opportunities in China. Opinions expressed are her own.
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