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Wednesday, January 25, 2006

China Shining ?

China's Economy Expanded 9.9% in 2005, Passing U.K.

http://quote.bloomberg.com/apps/news?pid=10000006&sid=a9s9DQHceaf0&refer=home

Jan. 25 (Bloomberg) -- China's economy grew 9.9 percent in 2005, probably overtaking the U.K. as the world's fourth largest, powered by record exports and investment in manufacturing.
Gross domestic product rose to 18.2 trillion yuan ($2.26 trillion) after expanding 10.1 percent in 2004, statistics bureau Commissioner Li Deshui said today in Beijing. The U.K. government will release an estimate for 2005 GDP today.

Premier Wen Jiabao wants to encourage spending by the nation's 1.3 billion people to reduce China's reliance on overseas markets and investment for growth. The manufacturing expansion that helped China's economy more than double in size in the past decade has led to excess capacity that may cause bankruptcies, bad loans and job losses, said Li.

"China relies too much on exports, and consumption is too weak,'' said Ha Jiming, chief economist at CICC Corp, China's largest investment bank. "If external demand falls for any reason and domestic demand can't consume what China's producing, you'll get overcapacity, wasted investment, deflation and rising non-performing loans.''

The economy grew 9.9 percent in the fourth quarter from a year earlier after expanding a revised 9.8 percent in the previous three months, the statistics bureau said today. Economists forecast growth of 9.5 percent in the quarter and 9.8 percent for the full year, according to a Bloomberg News survey.

The Morgan Stanley Capital International Asia-Pacific Index added 0.7 percent to 125.96 at 2:15 p.m. in Tokyo.

Bad Loan Risks
Li told reporters he's ``cautiously optimistic'' about China's growth outlook for this year. ``The driver of the economy is shifting from investment to a more balanced situation based on consumption,'' he said. Average GDP growth of 10 percent is sustainable for ``many years,'' said Li.

Even so, Li cautioned that China's economic growth still isn't efficient and said the government should seek to prevent fixed-asset investment from rebounding. Overcapacity in industries such as automobiles, steel and aluminum may boost unemployment, he said, adding that banks should be more careful in lending.

"Overproduction is a threat because it will introduce bad loans among banks, cause bankruptcies and lead to rising unemployment,'' Li said. "So it's very important that we guard against this.''
Steel capacity is already 120 million tons greater than demand and an additional 70 million tons is under construction, the National Development and Reform Commission said Dec. 3. More than a quarter of the nation's 10.3 million tons of aluminum production capacity is lying idle and vehicle production capacity is 2 million more than needed.

Commodities
China's banking regulator told banks on Jan. 18 to monitor their lending more closely, especially to industries where the government is restricting expansion, to prevent non-performing loans from amassing. China's banking system has created almost $850 billion in bad debt over the past 15 years, UBS AG said in a report the same day.

Surging demand from China has driven up global commodities prices in the past year, putting pressure on corporate profits.

Copper for April delivery, the most active contract on the Shanghai Futures Exchange, rose as much as 450 yuan, or 1 percent, to 44,300 yuan a ton today, bringing gains in the past 12 months to 50 percent. Benchmark oil prices in New York have jumped 34 percent in that period and aluminum prices in Shanghai gained 26 percent.

The U.K. economy was worth $2.14 trillion in 2004, according to the World Bank, and the Organization for Economic Cooperation and Development has forecast 1.7 percent growth for the country in 2005. The U.S. economy, which measured $11.7 trillion in 2004, is the world's largest.

Growth Engine
Exports, coupled with booming fixed-asset investment, made China the world's fastest-growing major economy and an engine for worldwide expansion. China was the second-biggest contributor to global growth in 2004, after the U.S., according to the International Monetary

Fund.
The nation's exports surged 28 percent to $762 billion last year, generating a record $102 billion trade surplus. Overseas sales amounted to almost 40 percent of GDP, compared with about 25 percent in France, according to the World Bank. Investment makes up almost half of China's output.

The forces that drove China's growth also led to difficulties. Its main trading partners accuse China of maintaining an undervalued currency to spur exports. The country is also suffering from transport bottlenecks and power shortages in several provinces.

Tariffs?
"The composition of growth is becoming more important,'' said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh, which oversees about $225 billion. ``The more it is orientated toward fixed-asset investment and exports, the more we are going to be seeing pressures for a revaluation and a potential trade disruption.''

Lawmakers in the U.S., the biggest market for Chinese exports, say a 2.1 percent revaluation of the yuan against the dollar in July isn't enough and are considering tariffs on imports from China.

Expansion may slow to as little as 8.5 percent this year as growth in exports and investment cools, the statistics bureau said yesterday, citing a survey of 77 economists at the nation's top planning agencies. That would be the slowest pace since 2001.

A nationwide census completed last year that revealed millions of previously unaccounted-for services companies helped ease concerns about China's ability to sustain growth. The census, published last month, added $284 billion -- equivalent to the output of Austria -- to China's 2004 GDP and suggested services are more important to the economy than previously thought.

Five-Year Plan
In announcing their blueprint for economic development for the coming five years in October, China's leaders said they will step up efforts to stimulate consumer spending in an economy where per capita incomes are still a 16th of France's.

Wen, 63, is also seeking to bolster living standards in the rural areas that are home to 800 million Chinese, and where incomes are a third of those in towns and cities. China abolished agriculture taxes from Jan. 1 and is lifting minimum wages.

Li said today that China's per capita income in 2005 was $1,700. That's up from $1,500 in 2004, when China ranked 129th in the world, behind Egypt and Iran, according to World Bank figures.
Companies such as Harley-Davidson Inc. are seeking to tap into that growth. A majority of business leaders plan to invest in China in the next three years, a PricewaterhouseCoopers LLP survey presented today at the World Economic Forum in Davos, Switzerland, showed.

Hogs in China
Harley-Davidson, the biggest U.S. motorcycle maker, plans to open its first dealership in China as early as this year, it said last week.

Overall consumption, which includes government spending on services such as education and health as well as consumer purchases of houses and cars, accounted for about 55 percent of GDP in 2004, the lowest ratio since free-market reforms began in 1978, according to the Asian Development Bank.

Wen said the lack of public services is the ``weakest link'' in the development of rural areas, the official Xinhua News Agency reported on Jan. 19. He was cited as saying the government will spend more on health, education and infrastructure in the countryside over the next five years.
Raising rural incomes is a ``top priority'' for the government, the statistics bureau's Li said.
Limited access to public services has led to a savings rate that's too high and comes at the expense of consumer spending, economists said. China's gross savings rate was 47 percent of GDP in 2003, double the world average, according to the World Bank's 2005 World

Development Indicators report.
"The government has to spend more on education, healthcare and pensions to take the burden off individuals and give them more confidence to spend,'' said Qu Hongbin, an economist at HSBC Holdings Plc in Hong Kong.

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