CHINA: China GDP 'to grow 9.5% in 2010'

China has been accused of keeping the yuan artificially low to help exports

Page last updated at 07:30 GMT, Wednesday, 17 March 2010

The World Bank has raised its 2010 economic growth forecast for China to 9.5% from 9%.

It said consumption by both businesses and households would grow strongly, even though government stimulus measures were being pared back.

But the bank warned that Beijing needed to cool inflation and try to cut the risk of a bubble in property prices.

It urged China to let its currency appreciate to contain prices and to stop the economy overheating.

"Strengthening the exchange rate can help reduce inflationary pressures and rebalance the economy," the World Bank said in quarterly update on the world's third largest economy.

Earlier this week, Chinese Premier Wen Jiabao accepted that inflation would be a major challenge as Beijing tried to keep its recovery going.

However, he rejected criticism that China was keeping its currency undervalued in order to boost exports.

He said keeping the yuan stable was "an important contribution" to global recovery from the economic downturn.

Currency pressure

The yuan was tied to the dollar until 2005 when it was allowed to rise in value by about 20%.

The peg was reinstated in 2008 when the global economic crisis cut demand for Chinese products and factories began closing.

China is facing pressure, particularly from the United States, to let the yuan appreciate. A failure to revalue its currency and keeping it artificially low, is giving Beijing an unfair edge in trade, critics say.

China's GDP grew by 8.7% in 2009. Beijing's official growth target for 2010 is 8%.

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CHINA: Thrifty Chinese resist enticements to spend

A woman in the city of Hefei in Anhui province shops for holiday items ahead of Sunday's Chinese New Year. The Chinese are traditionally more comfortable saving their money than spending it. (AFP / Getty Images / February 7, 2010)

An official push to promote consumerism as a way of reducing dependence on exports faces cultural hurdles.

By David Pierson and Barbara Demick

February 13, 2010

Reporting from Beijing

To re-balance their economies, Americans need to save more and the Chinese must loosen their wallets.

But judging from homemaker Wang Fang's grocery cart leading up to the biggest holiday of the year here it's going to take some doing to persuade consumers here to shop til they drop.

Her annual splurge, timed to Sunday's Chinese New Year festivities, included a sack of rice, a jug of cooking oil and a bag of beef jerky. Wang's lone personal indulgence: a $40 foot-washing basin she bought using a gift card from her husband's state-owned gas company.

"Chinese people like to buy practical gifts," said Wang, 49. "So it's mainly food and drinks. We're not going to buy junk that lasts one or two years."

Debt-strapped Americans would do well to mimic Wang's self-restraint. But in macroeconomic terms Chinese frugality is not a virtue. China's economy is overly dependent on foreigners to buy its low-cost exports, a weakness that was exposed during the recent global downturn. The government is now trying to encourage its own citizens to spend, with the goal of building reliable domestic demand for Chinese products.

"We must . . . transform the current development model that is excessively reliant on investment and exports," Li Keqiang, the vice premier widely expected to be the next prime minister, said last month at the World Economic Forum at Davos. "We will focus on boosting domestic demand."

It won't be easy.

China's rapid rise might be the envy of nations across the globe. Yet for all the talk of its economic miracle, Chinese consumers are taking home a shrinking share of the pie. In the 1990s, household income accounted for 72% of the country's gross domestic product. By 2007 it had fallen to 55%, according to a study on Chinese consumption by consulting firm McKinsey & Co.

That's because Beijing has geared China's economy toward production rather than consumption. It's a formula that has provided millions of workers with employment but no quick path to the middle class.

Driving the disparity, experts said, is China's decision to subsidize manufacturing and exports at almost any cost to keep its factories humming. The government has showered its manufacturers with low-interest loans, export subsidies and other incentives to give them an edge over foreign competitors. Beijing has also kept its currency, the yuan, artificially low so that its goods remain cheap abroad.

That has been a boon for Chinese factory owners and other well-connected elites. The nation boasted 42 billionaires on Forbes' most recent list of global tycoons.

But wages for most Chinese workers have grown slowly, while their tax burden has risen to help finance all those business subsidies. Meanwhile, a weak currency has fueled inflation and makes imports more expensive for consumers at home.

The McKinsey study said the average Chinese worker has to put in seven hours on the job to earn enough to purchase the same amount of goods or services that an American worker could buy with one hour's pay.

Yu Yaocai, a 28-year-old junior high school teacher in Beijing, said he set a $300 budget for the holidays, about $40 less than his monthly pay. He said he would put the expenses on his credit card but would pay it off promptly when the bill arrived.

"I only buy something when I need to buy something," Yu said.

To be sure, living standards are rising here. China surpassed the U.S. last year in auto sales, and it's the world's No. 1 cellphone market. Still, more than half of China's 1.3 billion people remain in the countryside, where per capita income in 2009 was $758. City dwellers averaged earnings of $2,773 last year, about 15 times less than what the typical American earned.

Persuading Chinese consumers to spend considerably more of their disposable income will require a massive cultural shift. The Chinese savings rate is more than five times higher than that of the U.S. That's largely because citizens here can't count on the government to supply them with adequate education, healthcare or retirement benefits.

Hu Yuping, a homemaker from a rural suburb outside Beijing, said she's trained her family to survive on about $1 a day. It's the only way they can afford her son's college tuition, which costs $1,000 a semester.

Her husband had to give up a job as a taxi driver because of diabetes. Their savings helped pay his medical bills. To make ends meet, he's taken handyman assignments in his village.

"We don't buy anything big," said Hu, whose deep crow's-feet and graying hair make her look far older than her 46 years. "The last time we did was five years ago when we bought a television."
The central government has launched plans to shore up healthcare and pension plans, but the efforts are still not enough, experts said.

Chinese people "still do not feel secure about their future," said Zhao Ping, an economist with the Ministry of Commerce, who researches consumer spending. "Social security is not well-developed. People in the rural areas have to save money for old age; children [providing for their parents in their old age is]the traditional way, but people can't rely on that because of the one-child policy. The government is trying to improve the social security system, healthcare and retirement programs in rural areas. Only when the system is established will people have the confidence to spend more."

A host of multinational firms, including Walmart, General Motors, Proctor & Gamble and Apple, are betting on it.

On a recent afternoon at one of the 156 so-called "hypermarkets" in China run by the French retailing chain Carrefour, hordes of shoppers elbowed their way through the aisles to stock up for the New Year's celebrations. Many said it was the most expensive occasion of year for them. Family meals had to be prepared and gifts had to be given to in-laws, colleagues and bosses.

The crowds weren't so thick in the electronics department, but traffic was jammed in the food aisles, where special red gift boxes of Peking duck, mixed nuts and rice wine were ready to be scooped-up by passersby.

"It's nutritious and the packaging is easy to hold," said He Liping, explaining why she bought her aunt a seasonally decorated box of organic eggs.

While thrift remains the watchword, some unapologetic consumers can be found in the upscale shopping districts that are springing up in the big cities.

Steven Chen, a 23-year-old musician, said his fashion icon was hip-hop star Kanye West. The Beijing native proudly described his ensemble while standing outside a designer T-shirt store: a Victorinox beanie, a Billionaire Boys Club jacket over a Uniqlo hoodie, Buffalo jeans and teal-colored Nike sneakers.

"If I have the money, I'll buy it," Chen said, describing his shopping addiction. "It's my own money so my parents can't complain. Though they keep telling me to save and buy a house."

Nicole Liu and Tommy Yang in the Times' Beijing bureau contributed to this report.

View Article in the LA Times

Could China's Economic Policies Trigger Another Crisis?

By Bill Powell / Shanghai Tuesday, Nov. 03, 2009

Just before the global financial crisis exploded, the conference halls in China were alive with the rhetoric of economic reform. Hardly a week went by without some think tank or ministry in Beijing toasting the 30th anniversary of China's great opening to the world and outlining what the next phase of China's historic development would entail. At a time when experts and policymakers everywhere were decrying "global economic imbalances," China would do its bit to rectify them.

That meant attacking the problem at the root. Just as the U.S. saved too little while consuming too much, China saved too much and consumed too little. The result was a lopsided international trade scorecard. China ran huge current account surpluses — peaking at 10% of GDP in the first half of 2008 — and as a result accumulated a massive load of foreign exchange, which it turned around and loaned, mostly to the U.S. government, which enabled Americans to go on borrowing and spending. China, policymakers said, intended to break this unhealthy cycle.

Then a not-so-funny thing happened on the way to rebalancing: the worst economic crisis since the Great Depression. The Chinese response to sharp declines in manufacturing and exports has been cheered for its effectiveness. Government stimulus spending and loose credit powered the country's economy to an 8.9% growth rate in the third quarter, and the most recent Purchasing Manager's Index (PMI), a widely watched gauge of economic sentiment released on Oct. 30, rose for the eighth straight month. It now shows "sustained expansion in industrial activity," says Jing Ulrich, managing director at JPMorgan in Hong Kong. At the same time, the U.S.-China economic relationship is not as lopsided as it was a year ago, at least by some measures. The U.S. savings rate has increased to about 4% of GDP (from zero at the recession's onset), and China's current account surplus has fallen from 10% of GDP to about 6.5% of GDP. Both are improving for the same reason: shell-shocked consumers in the U.S., where the unemployment rate is 9.8% and rising, have snapped their wallets shut. Now that it's pouring, they have started saving for a rainy day.

It's the Chinese side of the equation, many economists believe, that remains unaddressed. Far from making the promised progress on needed structural reforms, China has either stood pat in the past year or has probably regressed in terms of taking steps that would reorient its economy toward consumption and away from savings and investment.

One obvious example, which will be front and center when U.S. President Barack Obama makes his first visit to China on Nov. 15, is the exchange rate of Beijing's currency, the renminbi (RMB). After allowing it to rise against the dollar by about 15% earlier this decade, China has since the onset of the crisis kept the RMB's value tightly pegged at about 6.8 to $1. Economists differ on how greatly undervalued the RMB is. The International Monetary Fund and World Bank contend that it's about 15%-25% below where it would be if it were allowed to float freely. Virtually all agree that it needs to move higher, both for China's sake and the sake of its trading partners. An undervalued currency reduces real household income in China by raising the cost of imports while subsidizing Chinese producers who sell their products overseas. As the dollar has declined in value in the past year, so has the RMB — making Chinese goods cheaper in the international marketplace. In other words, China's peg has helped it maintain its share of global export markets at the expense of other countries who let their currencies float. That's exactly the opposite of what needs to happen if rebalancing is to occur.

Ominously for Beijing, the value of the RMB may be one of the few things the fractious American political class seems to agree on. Recently, Paul Krugman, the Nobel Prize–winning economist and columnist for the New York Times — and a steadfast Obama cheerleader — wrote a column ripping Beijing for its "outrageous" currency policy. He was followed late last week by Martin Feldstein, a former chief economic adviser to Ronald Reagan, who made a similar argument in the pages of the Financial Times. Both noted that the RMB-dollar peg is badly hurting economies in Europe and East Asia and that if Obama raises this issue in Beijing (as he surely will), he'll have tacit backing from a lot of precincts.

Does Beijing care? In its response to the financial crisis — the depth of which absolutely stunned Chinese policymakers — China desperately pushed every familiar button to keep its economy from succumbing the way the developed world's did. It has thrown buckets of practically free money at state-owned banks, which in turn loaned it out to mostly state-owned companies in a wide range of industries. Banks also loaned money to real estate developers, who have added inventory to what were already overbuilt residential and commercial markets in several major Chinese cities. And now the government has turned around and acknowledged that the mind-bending surge in bank lending — by June of this year, total lending exceeded the amount for all of 2008 — has done nothing to rebalance China's economy between consumer and producer. In fact it's done the opposite: late last month, the National Development and Reform Commission, an important policymaking body, conceded that it must start implementing rules aimed at reducing overcapacity in several key industries, including steel and petrochemicals.

It isn't just indiscriminate bank lending that has retarded moves toward rebalancing. Outright government subsidies to businesses have increased in the past 12 months. Everything from bicycle makers to textile producers to chemical companies have seen their export subsidies rise because their markets worldwide were shriveling, and a panicky Beijing was spooked by the prospect of massive unemployment if factories shut down. "By transferring wealth from households to boost the profitability of producers, China's ability to grow consumption in line with growth of the nation's GDP is severely hampered," says Michael Pettis, a finance professor at Peking University's Guanghua School of Management. Indeed, although China is also subsidizing some consumer purchases and retail sales in China were up about 15% in the first nine months of 2009, consumption as a percentage of GDP remains today about where it was a year ago: at about a third of China's economy.

U.S. Federal Reserve Chairman Ben Bernanke has long let it be known that he thinks the imbalances between the U.S. and China contributed to the financial breakdown of the global economy. China's excess savings were sloshing around and needed a home, and profligate America was more than willing to borrow those savings. On Oct. 19, Bernanke gave a speech in which he said that while personal savings in the U.S. is now rising, the government had to get its own accounts in better order. He then pointedly noted that "policies that artificially enhance incentives for domestic savings and the production of export goods" have got to go in order "to reduce the risks of [future] financial instability."

That message was aimed at Beijing. It's one that will be reinforced when Obama arrives in China in two weeks. The only question is, will anyone in the Chinese leadership — who may believe the headlines about what economic magicians they've been for the past year — be listening?