China Growth Belies Challenges

[Stephen E Philion <philion@xxxxxxxxxx>]

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Published Sunday, Sept. 2, 2001, in the San Jose Mercury News
China's growth belies its critical challenges

Booming economy is still not enough to boost jobs; government sector lags
BY MICHAEL DORGAN
Mercury News Beijing Bureau

BEIJING -- China's biggest computer maker is blissfully out of sync with
the global economy.

As manufacturers elsewhere brace this year for a worldwide decline in
personal computer sales -- the first dip in 15 years -- China's Legend
Group is ramping up for a 42 percent increase.

The computer industry is not the only one here that's booming.

China's overall economic growth reached 7.9 percent in the first half of
the year and will likely top 7 percent for all of 2001. The U.S. economy
crawled at just 0.2 percent growth last spring, and Japan's economy, the
world's second largest, is probably shrinking. Most of the rest of Asia is
in deep trouble.

But while China's numbers look good, the country needs even faster growth
to provide jobs for its huge population. The problem is especially acute as
the government tries to reform its large and inefficient government-owned
industrial sector.

State factories have laid off millions of unneeded workers. Also looking
for jobs are large numbers of young people just entering the workforce and
the huge ``floating population'' of farmers who don't have enough land to
support their families and are looking for jobs in the cities.

Despite reforms, the government sector remains a big burden. China's banks
have a huge and growing volume of bad loans resulting from lending to
poorly run state-owned enterprises. And the government acknowledged in July
that more than 3,600 state-owned enterprises continue to lose money, and
the average return on assets of the top 100 state-owned companies is less
than 3 percent. Many have already laid off workers and can't absorb new
employees or even pay pensions.

These problems drain government revenue and limit Beijing's ability to move
forward with reforms that would lead to greater efficiency and economic
growth, said Deepak Bhattasali, chief economist for the World Bank's
Beijing office.

China's leaders ``are sitting there with their finger in the dike,'' he
said. ``The question on everyone's mind is, `How long can the government go
without addressing these problems in a more fundamental way?''

Bhattasali said China's economic problems are manageable over the short
term because the country has a relatively small amount of public debt, a
large amount of reserves and generally prudent fiscal policies. But he said
the economy is so inefficient that, even when growing at 8 percent per
year, it creates far fewer jobs than it needs.

``China needs 8 to 9 million urban jobs per year over the next 10 years,
and now it's creating only 5.5 to 6.5 million,'' Bhattasali said.

Andy Xie, the regional economist for the investment bank Morgan Stanley,
said China needs 10 percent growth to absorb new workers just graduating
from school or moving into the cities from the impoverished countryside. He
and Bhattasali said the new jobs in China will shrink if the economic
slowdown deepens in Europe and lingers in the United States. China's growth
seems guaranteed over the short term, but all bets are off in a prolonged
global slowdown.

Xie said one of the few immediate threats to China's economy would be a
dramatic decline in consumption in the United States. America buys about
$100 billion worth of high-tech equipment, textiles, shoes and other goods
each year from China, more than any other country does.

A 20 percent decrease in exports to the United States would shave about 2
percentage points off China's growth, by Xie's calculations. But he added
that such a steep drop in U.S. consumption was unlikely.

China's export growth has slowed in recent months, but still is expected to
be about 7 percent for 2001 after growing 28 percent last year. Higher
domestic consumption has offset the slowdown in exports. China's huge
domestic market continues to expand, consuming vast quantities of cars,
clothes and computers. Even so, deflation -- falling prices, which can sap
economic growth -- continues to be a worry.

Even with that expanding domestic market, most commodities in China are in
oversupply. That's largely because some consumers uncertain about the
future are reluctant to spend money, while others, especially in rural
areas, have too little to spend because of slow income growth.

The government has tried to coax money out of savings accounts and into the
economy by taxing interest, and it is pouring huge sums into roads, dams,
power plants and other projects. But the minister of the State Development
Planning Commission, Zeng Peiyan, admitted in July: ``Deflation still
lingers, although we have achieved success to a certain degree. The
national economy showed healthy growth last year, but the foundation for
sustainable economic growth has not been consolidated.''

China's leaders hope to get a big boost from joining the World Trade
Organization. China is expected to become a member of the rule-making body
for global trade later this year or early next year. Membership will give
it broader access to world markets in exchange for further opening its
markets to other countries.

By some estimates, WTO membership could raise China's share of world trade
from its current 3.5 percent to 5 percent or 6 percent. The U.S. share is
about 13 percent.

Lin Yifu, director of the China Center for Economic Research at Peking
University, said an economically strong China will serve as a growth engine
for the entire region and the world. ``China not only exports but also
imports,'' Lin said. ``It has a trade deficit with Asian economies.''

One neighbor suddenly eager to cozy up is Taiwan, a democratically ruled
island that China regards as a renegade province.

For more than 50 years, ever since the Chinese Nationalists fled to Taiwan
after their defeat by the Communists, the island has fiercely protected its
de facto independence. But Taiwan has suffered such a reversal of fortune
from the global high-tech slowdown that it plans to hook its economic cart
to China in ways that until now were prohibited as a threat to security.

An advisory panel to Taiwan President Chen Shui-bian has recommended talks
with China on opening direct trade, transport and postal links. It also has
advised that the island scrap the $50 million cap on Taiwanese investment
projects in China, which was imposed to avoid excessive dependence on China.

China's government-run Xinhua News Agency said Wednesday that Taiwan must
agree that it is part of China before Beijing will consider direct trade.
All connections now must go via Hong Kong, a detour that adds time and money.

By holding out the promise of prosperity, China may do more to advance its
goal of reunifying with Taiwan than it has achieved through decades of
threatening to use force.
--------------------------------------------------------------------------------
Contact Michael Dorgan at mdorgan@xxxxxxxxxxxxxxxxx

© 2001 The Mercury News.

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