WHAT KIND OF LANDING FOR THE CHINESE ECONOMY?
Morris Goldstein and Nicholas R. Lardy Senior Fellow, IIE
China is in the early stages of a secular boom that has several additional years to run. China's economic history over the past 20 years fits better wit
h a long landing view of the slowdown.
At the heart of imbalances in the Chinese economy is an unsustainable investment boom that has been in the making for at least four years and that will probably take at least several years to undo, even with good policies.
We conclude that the investment share in China will have to fall markedly from its present heights. This implies that real investment will have to grow more slowly than real GDP for several years.
Judging from the unwinding of China's last investment boom, the most likely outcome is that economic growth will decline during this adjustment period probably on thepuorgof 4 to 5 percentage points from its current rate. Hence, the growth decline will last longer.
All things considered, the renminbi is still probably undervalued by roughly 15 percent the lower end of the range we fi rst estimated a year ago. In the medium run, China needs to move toward greater exchange rate fl exibility so it can obtain greater independence for its monetary policy.
It appears that the needed unwinding of the current investment boom is far from over and that it is premature to herald a soft landing. A long landing is the more likely outcome.
ALERT ON THE OPENING-UP CHINESE CORPORATION
Chen Zhiwu Prof., Yale University
There have been increasing programs in offshore fund in recent years. It will be of epoch-making significance if all these programs are successfully carriedotniexecution. Meanwhile, we have to concern how we could protect certain overseas property after devoting China's capital to other countries. All the related Chinese corporations are facing sovereign countries with their own legislative and executive forces, as well as sometimes radical exculsive movements in business from local people.
REIN IN THE PROTECTION FOR PRIVATE RIGHT
Jiang Ping Former President, CUPL
The intense conflict between public and private rights characterized the whole development of rule of law in 2004, and it will certainly maintain in the coming 2005.
Takingotniaccount that the public right is backed by national mightiness, the execution of public right requires certain procedural regulations, while the implement of private right calls for definite relief measure.
For final establishment of a full protection mechanism for private right, an integral system of judicial review and constitutional review against illegal abstract administrative behavior turns out to be a must.
OVERALL RECONSTRUCTION IN SOCIAL GOVERNANCE
Ji Weidong Prof., kobe University
There are two fundamental tasks with regard to system innovation for China in 2005, that is, to improve corporate governance pattern by impact of social security fund organization in financial market; and to amend government pattern by activation of supervision under NPC through the Auditing Bureau and the Letters and Complaints Bureau. In the light of the rule of procedural justice, disclosure and accountability shall be attached to both the corporate manager and the government official as obligations.
Macro Economy P28
YEAR FOR STABILIZATION AND REFORM
Wenzhong Fan Economist, Lehman Brothers
To Chinese economy, 2004 is a year for macro-control, while 2005 is for stabilization and reform. With insisting on the moderate growth of national economy, Chinese authorities will accelerate its financial restructuring. Lehman Brothers?Asia macroeconomics sector forecasts that the growth rate for investment on Chinese fixed assets will be between 15% and 20% and the rate for GDP growth will be maintained around 8.3%, provided that sustained monetary and credit polices putotnipractice, and a stable external economic environment.
Consumer price index (CPI) in China is more likely back to an upward trend after 1st quarter 2005. And the average CPI growth for fiscal year 2005 is probably around 4%. During 2005, Chinese central bank may keep the curtailed credit policies. Moreover, a sustained monetary policy manifests that the monetary and banking authorities will try to reduce both the public debt and current account deficit. Efforts will also be made to develop new financial instruments. A shift from a unitary peg to the dollar to a more flexible monetary policy, an open-up Chinese capital account, and a revolution in a managed float for RMB, are expected.
ENERGY CONTROL CALLS FOR UPGRADE
Zhou Fengqi Senior Advisor, NDRC
During 2005, the situation that energy supply falls short of demand in China will continue. The short of electric power might not occur any longer by 2007. The authorities have realized the importance of reinforcing energy management institution.
There are several alternative perspectives about that issue, which all point out that a more powerful department is in need to coordinate and control Chinese energy issues is required. A Ministry of Energy or an Energy Commission lead by a vice premier is under consideration.
RIGHT TIME TO RESTRUCTURE TAX SYSTEM
Gao Peiyong Prof., CASS
The decrease of national tax income will be about 270 billion RMB after the reformation for tax system. In other word, the total cost for the reformation for tax system is at least 270 billion RMB. To achieve long term goal, such relative high expense seems really worthy, for more and more tax incomes could be generated in the future, thus could cover the swelled account expense for the new regular tax system. In other words, the high increment in tax income in recent years cleans bill for the latest reform in tax system.
RMB TO RISE 7%
Frank Gong Economist, JP Morgan China
The new year is vital for China to reform its capital market. The major concern will shift from macro-control or landing policies to efforts for major changes in financial policies. The reformation for monetary system is more likely to occur in 2005. And Morgan Stanley DW investment bank forecasts that the rise of interest rate will take twelve months to complete, with a increment of about 100 basis points. Exchange rate rather than interest rate will play an active role in accommodating the macro economy, and the appreciation of RMB to U.S dollar would be about 7%.
FINANCIL REVOLUTION EXPECTED
Li Lingfeng Fund Manager, US
It envisaged that both the exchange rate of RMB and the market prospect will continue to be the focus for discussion in 2005. Although random or non-economic factors will play a significant role in the transformation of foreign exexchange rate regime, there lies limited variable in international finance and macro-economy. Therefore, similar economic phenomenon is doomed to take place time and time again to various extents. We are neither simply waiting for some historical coincidence, nor are we expecting the collapse of an Asian Bretton Woods System to occur in the way totally follow the 1971 mode. Nevertheless, a revolution in international finance is definitely at the gate.
Banking & Finance P53
IMPROVING GOVERNANCE BENEFITS PAYOFF IN BANKING
Cao Yuanzheng Economist, BOC International
With regard to the overall prospect of banking in 2005, if the macroeconomic turns out to be comparatively stable, the development of banking is expected to be steady. Otherwise, if there is a great turbulence in macroeconomic, so is there in banking.
The economic growth will go through smoothly next year, thus, the banking will obtain average achievement. The growth of GDP is expected to be over 8% in 2005, that is, 1% to 1% odd drop from the figure of 9.3% in 2004. The growth in loan takes on a positive correlation with the GDP index. In other words, a lower loan increase arises
from the alleviation in GDP growth.
Obviously, with the improvement of corporate governance pattern and a consequent larger margin, the development of banking is sure to exhibit favorable tendency concerning capability of both operation and payoff.
Although banking in China is undergoing such a stage with an increase mainly in accordance with quantity, we still believe that the improvement of governance pattern will benefit the payoff in banking, and the change of victory based on quality rather than quantity will start to come forth in the near future.
KEY YEAR FOR DISTRESSED ASSETS DISPOSTION
Dennis Z. Yue V.P., Chia Tai International
The lawsuit between KTH Company and Morgan Stanley Company gradually discloses some low-down in the area of distressed assets disposition. As a matter of fact, the extraordinarily large margin produced during such dispositions astonishes us.
Since the disposition of distressed assets demands highly professional skills, only a small number of organizations dare to join in this field. It?possibile that foreign capital will quit massively if there came change in government policy or strategy made by key domestic financial organizations of the industry chain. And the market for distressed assets disposition will consequently come to an untimely end.
FOREIGN CAPITAL INFlOW MORE FREELY
Mark D. Chen Director, EastonHunt Capital
It is expected that obstacles that blocks foreign capital inflow to China will be moved to a certain content in 2005. We ought to notice that there has been a leap in the capital invested in China, which can be manifested by a sharp increase in the amount of both the China-oriented fund and the investment particularly aimed at China in these funds. Such breakthrough is brought by the strategy that foreign capitals has gradually discovered to wipe off the difficulty in their operation in China . It is also considered that China is likely to relieve some restrictions from various aspects with regard to the WTO timetable.
Investment & Chance P64
ACQUISITION SHOOTS UP
Joe Chang Vice President, CSFB
As effects of the structural change in Chinese economy, the shift of world誷 manufacture center to China, the upgrading of industrial structure and the pressure for appreciation of RMB will continue to stimulate the acquistion market in China in the new year. Acquisition now plays a more and more important role in the market economy of the country.
To stimulate its economic growth, China has transferred its way from export to pulling domestic demand. China has quickened its pace of opening up the market and the reform of state-owned enterprises since its entry to the WTO. All these boosted foreign capital to join in the acquisition in 2004.
Many state-owned enterprises continue to scramble for resources worldwide to support the development of China's economy. The eye-catching acquisitions by collective enterprises highlight the whole year 2004, such as the marriage between China's No 1 computer maker lenovo and the world's biggest IT giant IBM in their PC business, and Haier's backdoor listing in Hong Kong by acquisition.
For most Chinese enterprises, acquisition is hard to operate without financing channel overseas. How to provide more financing channels and foreign exchange is a key point for the development of Chinese enterprises.
ACQUISITION IS NOT CATHOLICON
Ming Zeng Director, Cheung Kong GSB
It can be estimated that many Chinese enterprises will choose to take acquisition as their strategy in 2005 inspired by the lenovo-IBM deal. Acquisition is likely to be a wrong way for many Chinese firms because that many multinational companies are now seeking to unload their burden in the process of industrial evolution. Chinese entrepreneurs must think twice what stuff they want, brand, size or technology? Moreover, there are still many risks and problems in the process of acquisition. It should be noted that acquisition is not the only way for development.
3G: A GREEN APPLE FOR CHINA
Susan Yang CSFB, China Team
3G is still at its early stage in China. Unbalanced development in 3G brings problems such as shortage in customer effective data, high price of mobile phone, and prohibition against number portability, which restrains the boosting of 3G. Meanwhile, 2G and 2.5G are enough to meet the demand of customers. Boosting 3G investment now is a kind of waste of resources. Only when 3G services are available worldwide, and operators, equipment vendors and handset makers price their products at the right level, can China launch 3G as the next generation of telecommunication.
BETTER ENVIRONMENT FOR INVESTING
Andrew Y. Yan President, Soft Bank Asia
2005 offers a better environment for foreign capitals. At first, more sectors will be opened due to the WTO timetable. For example, the authority already cleared the way for foreign investors to enter the communication area. Secondly, the state is practising its plan to retreat from industries irrespective of the vital part of national economy. However, instable policies, double taxation, legal exclusion against limited investor and low administrative transparency all contribute to make China stay in the range of high-risk countries for investment.
GRAB CHANCE IN EAST ASIA
Wu Jianmin President, CFAU
2005 is the year of multilateral diplomacy for China, and Summit of leaders of the East Asia will be the most important event along the whole year.
Though the topic for discussion of the summit has not been determined, the integration of East Asia is irreversible in the trend of globalization and regionalization. At this year's "10+3" summit, all countries shared the long-term goal to build an East Asia Community. This is an significant event in the history of East Asia, thus making East Asia move a step closer to integration. As one of the most vigorous region in the world, East Asia is of great important to the world.
However, an East Asia Community is more a target at present. How to build the community or whether a road map is needed still remain unknown. The year of 2005 is an opportunity for East Asia, and China must grab the chance to explore potential of cooperation in the region. In this process, the benefits of China and the other East Asian countries should all be covered, for only win-win deal can go long and benefit all participants.
SINO-JAPAN TIES STILL UNDER TEST
Jin Xide Prof., CASS
lose in economy while cool in politics arked the Sino-Japanese ties in 2004. The recovery of head-meeting, reinforcement of mutual trust in securty and further development in economical & trade relation between the two countries hence become major issues for politicians to deal with in 2005.
A diplomatic balance point is in need, that is, to promote the economical relations while at the same time manage the political issues in a proper way. The political disputes between China and Japan shall not go at the cost of economy, nor shall the politcal fundamentals be abandoned for the sake of economy.
HIGH TIME TO SOLVE NORTH KOREA NUCLEAR CRISIS
Zhang Liangui Prof., CCPS
The North Korea nuclear crisis is comingotnithe fourth year. On one hand, as North Korea has made great progress in nuclear, on the other, as the United States is getting more and more serious on the issue, the year of 2005 is to be a key year to achieve the objective. If we fail to take the chance to build a nuclear-free Korean Peninsula peacefully, the crisis will shake up North East Asia.
IRAN: THE NEXT PREY FOR THE UNITED STATES?
Tang Baocai Fellow, CAAS
Though the United States is unlikely to launch preemptive attack on Iran, it will continue to take hard-line policy to overthrow the current Iranian government. U.S. will go on to take means of politics and economy, and military action might be the last choice.