allAfrica.com: Africa: Country Has Tricky Task of Avoiding Hard Landing (Page 1 of 2)

CHINESE growth has shown little sign of dipping in the last five years. Exports have continually increased while currency reserves have exploded.

The two-digit growth (11,4% last year and 11,1% in 2006) and financial soundness (the world's biggest reserves) continue to surprise analysts. Nevertheless, various weaknesses are concealed behind these excellent performances. Bringing an overheating economy under control is now a priority for the authorities in order to avoid the nightmare scenario of a hard landing.

Industrial over-capacity (notably in the automotive, iron and steel and real-estate sectors) could lead to a trimming of company margins, which could result in financial difficulties.

Signs of this risk are already visible in the extended payment times observed by Coface.

Social tensions, notably with regard to the issue of land requisitions, are intensifying. Furthermore, governance problems continue to have an effect on the business climate.

China's current surplus reached 9,4% of the gross domestic product (GDP) in 2006 and could have been as high as 11,6 % last year. This increase not only reflects a boom in exports but also a slowdown in imports.

The rise in exports remains at a rate of 28% a year (more for manufacturing goods) based on productivity gains, whereas the growth in imports fell from 37% in 2004 to 20% in 2006.

This upscale trend has made it possible to replace imports with the domestic production of machines, electronics, cars and refined metal products.

As a result of the strong current surplus, the level of currency reserves is very high, even in comparison to the rest of Asia. They are now the highest in the world and reached $1530bn in December. China previously invested the majority of its reserves in US treasury bonds but it is now aiming to diversify its investments.

With this goal in mind, the Chinese authorities created, in May last year, the State Investment Company, an investment fund that should manage $200bn-$300bn, taken from the currency reserves.

The fund may acquire securities from both American and European groups (and even groups from emerging countries) as well as oil drilling licenses.

China is consequently becoming a major exporter of capital.

With regard to the budgetary situation, the rise in fiscal revenues has generated a significant improvement in the public accounts, with the growth in tax revenue now faster than expenditure. Nevertheless, the official evaluation of the public debt (17% of GDP) underestimates the total out-of-budget commitments: ie recapitalisations of the state banks, local entities' debts and the cost of pension reform. Taking all these factors into account, the public debt would clearly be closer to 50% of GDP.

The most worrying problem lies in the auditing of new loans. The growth of credit to the private sector is still very strong, representing 108% of GDP in 2006 and 114% of GDP last year.

Investments have reached a record level in terms of a proportion of GDP; 44% according to the International Monetary Fund. They are continuing to increase, and indeed are the driving force behind economic activity. In order to re-balance economic activity, the authorities are keen to see a rise in household consumption.

The monetary policy does not seem to be very efficient at slowing down the growth rate. Since June 2006, the four interest rate rises and six bond reserve increases have only put a very slight brake on banking credit.

These credits principally concern public companies, as a result of their close links with the local authorities and banks. The private sector, however, at the source of the investment boom, essentially finances itself and has a more limited access to credit.

There are still some gaps in China's governance. In the ratings drawn up by the World Bank, China is in 142nd position out of 204 for corruption, behind Brazil (106th) and India (109th), but ahead of Russia (147th).

Out of all the regions in the Asian zone, China is positioned approximately in the middle: ahead of Vietnam and Indonesia, but below Thailand.

This positioning is confirmed by Transparency International, which rates China 71st out of 163 in its perceived corruption rating in 2006. Transparency International also highlights the difficulties involved in fighting corruption in a country whose legal system is somewhat opaque.

China is also positioned in the middle (113th/200) for the quality of its regulations, rubbing shoulders with Russia (115th). The bankruptcy law, introduced last year, could represent progress, providing it is effectively applied.

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