China’s Plan to Raise Rates, Tame Growth May Hurt World Economy

May 10 (Bloomberg) — China’s economy is twice the size and its imports three times as large as when the central bank last raised interest rates in 1995, fueling concern this year’s curbs on lending will have a larger global impact than nine years ago.
Chief executives, including Ericsson AB’s Carl-Henric Svanberg and Nucor Corp.’s Daniel DiMicco, say slower growth in the world’s seventh-largest economy is needed to sustain expansion in the years ahead. Premier Wen Jiabao’s plan to cut growth to 7 percent this year from 9.1 percent in 2003 will pull down commodity prices worldwide and may cause a deeper slump that would slow global growth, said economist Tim Condon.


“Greater integration means a slowdown in China is going to have more effect on Asia and the entire global economy,” said Condon, head of Asian financial markets research at ING Groep NV in Hong Kong. “That accounts for the heightened interest in the possibility of a sharp slowdown.”
Condon says the central bank may raise its one-year lending rate, now at 5.31 percent, by a quarter of a percentage point as soon as this week. Goldman Sachs Group Inc. predicts the rate will be as much as a percentage point higher in 12 months, and Credit Suisse First Boston says it will be 2 percentage points higher by the end of 2005. Central bank spokesman Bai Li declined to comment.
Soft Landing
China’s last two attempts to achieve a soft landing — a gradual economic slowdown after a period of rapid expansion — cut growth by as much as two-thirds. Under former Premier Li Peng, growth tumbled to 3.8 percent in 1990 from 11.3 percent in 1988.
Former Premier Zhu Rongji, then vice premier in charge of economic policy and central bank governor, slowed the economy to 7.1 percent growth in 1999 from 12.8 percent in 1994. His last rate increase, in July 1995, was by 1.08 points to 12.06 percent.
Premier Wen, 61, said on Thursday he must slow growth without causing a slump. The economy rose by 9.7 percent in the first quarter, compared to the same period a year ago. That followed 9.9 percent growth in the last quarter of 2003.
“The car is going at a very high speed, and we need to reduce the speed,” Wen told a business forum during a visit to the European Commission in Brussels. “But we should not have a very sudden braking.” A slowing of China’s growth is bound to affect other markets, he said.
“Commodity markets will be at the forefront,” Wen said.
Broad Implications
As interest rates rise again and loans are halted to some industries, growth will probably slow to 8.7 percent this year and 7.8 percent in 2005, according to the median estimate of eight economists in a Bloomberg News survey. The Asian Development Bank predicts 6.8 percent growth next year.
That slowdown has broad implications because China accounted for 32 percent of Japan’s export growth last year, 36 percent of South Korea’s and 68 percent of Taiwan’s, according to a May 3 report by Morgan Stanley Chief Economist Stephen Roach. China accounted for 28 percent of Germany’s export growth and 21 percent of export growth in the U.S.
“We can’t be too relaxed considering the amount we export to China,” South Korean Finance Minister Lee Hun Jai told reporters on May 3.
U.S. Federal Reserve Chairman Alan Greenspan told a bankers’ conference in Chicago via satellite from Washington on May 6 that commodity prices are most likely to fall as China’s growth slows, which will help restrain inflation in the U.S. and other countries.
Restraining Inflation
“Clearly, if their rate of growth slows down we are going to see a backing up of some of those prices, and indeed we’ve already seen it,” Greenspan told the group.
China consumed 55 percent of the world’s cement production and 36 percent of its steel in 2003, driving a 40 percent gain in imports to $413 billion, according to the State Statistics Bureau. China’s imports were $132.1 billion in 1995.
Wen is focusing on curbing prices of commodities after coal costs surged 24 percent in March from a year earlier and steel costs rose 36 percent, outstripping the 3 percent gain in the consumer price index. The government ordered curbs on lending to the automotive, steel, cement and real estate industries on April 30.
“They can’t handle the growth they’re generating right now,” said DiMicco, chief executive officer of Nucor, a Charlotte, North Carolina, company that’s the biggest U.S. maker of steel from recycled metal. “They have driven commodity prices way higher than they should have.”
More Risk Ahead
Prices are already falling. Copper prices plunged 11 percent and nickel fell 20 percent in April. Shares of BHP Billiton Ltd., the world’s largest miner, led a slump in Asian stocks that month.
The Morgan Stanley Capital International Asia-Pacific Index, which tracks 859 stocks in the region, fell 6.4 percent in April and another 3.2 percent so far this month.
“We see more risk of a cooling off in the economy,” said Pascal Voisin, chief investment officer of Credit Agricole Asset Management and Credit Lyonnais Asset Management in Paris, who oversees the equivalent of $316 billion. “We cut back on our exposure to emerging markets.”
Demand for emerging-market bonds fell on Thursday and Friday after Greenspan’s comments. Brazil’s benchmark bond due in 2040 and its currency sank to eight-month lows. Emerging-market economies like Brazil and Argentina have benefited from a boom in demand from China for commodities such as soybeans and iron ore.
`Irrational Exuberance’
“A slowdown may take some of the irrational exuberance out of the market, to use Alan Greenspan speak,” said Peter Johnston, chief executive of Minara Resources Ltd., which operates the A$1 billion ($732 million) Murrin Murrin nickel mine in Western Australia. “It may leave a more realistic view of the market.”
China’s influence on world economies is growing. China’s gross domestic product of $1.41 trillion, 3.9 percent of the 2003 world total, is more than triple the size of Brazil’s. In 1995, both economies were worth about $700 billion.
Still, Gary Thayer, chief economist at A.G. Edwards & Sons Inc. in St. Louis, said a slowdown in China is unlikely to stall world growth.
“China’s economy is only one-eighth the size of the United States and less than half as big as Japan,” Thayer said. “The U.S. and Japanese economies are both on the upswing. Even if China taps on the brakes and slows growth from 9 percent to 6 percent, world economic growth is likely to remain strong.”
Materials Shortages
U.S. Steel Corp. Chief Operating Officer John Surma said China’s slowing economy would make raw materials such as iron ore and coke for blast furnaces more available to the global market. Materials shortages have idled some U.S. mills, causing delivery delays, he said in a May 7 interview.
Wen said during a visit to Germany that international companies should push ahead with their expansion in China. Stuttgart, Germany-based DaimlerChrysler AG, the world’s fifth- largest automaker, said on May 3 it will build Mercedes-Benz luxury cars in Beijing. The next day, Siemens AG formed a venture with XJ Electric Co., based in Henan province, to manufacture power transmission equipment.
“They are keeping an even temperature in the fire,” said Svanberg, chief executive at Ericsson, the world’s largest telecommunications equipment maker, which generated 9 percent of its first-quarter sales in China. “It’s only welcome if the Chinese authorities want to keep long-term stable development.”
Unauthorized Lending
Ericsson, which has 3,000 people working in China, will likely shift more resources there as the country prepares to issue four new mobile-phone licenses, probably next year.
Market researcher IDC forecasts mobile-phone network spending in China will be $8.35 billion this year, rising to $8.57 billion in 2005.
Clive Standish, chief financial officer of Zurich-based UBS AG, Switzerland’s biggest bank, says the government is trying to stop unauthorized lending by local banks rather than stifling all investment. Chinese companies raised $7.5 billion from overseas share sales in the six months to the end of March, according to Bloomberg data.
“International players are basically doing the cross-border business,” Standish said.
China Power International, a state-owned utility that’s run by Li Xiaolin, the daughter of former Premier Li, decided last week to go ahead with a $500 million overseas share sale as soon as next month, Oriental Daily reported.
Huge Demand
“The euphoria in January has gone, but there’s still a huge demand for the China story,” said James Pearson, ABN Amro Asia’s head of corporate finance.
Foreign direct investment into China rose 7.5 percent to $14.1 billion in the first quarter from the same period a year ago.
Alcoa Inc. Chief Executive Alain Belda said a slowing Chinese economy won’t change the world’s biggest aluminum maker’s strategy, because China’s consumption of the metal is still rising by as much as 20 percent.
“We’ll continue to invest and grow in China,” Belda said at the company’s annual meeting on April 30 in Pittsburgh.
Smaller Chinese companies may be hurt most by the government’s move to curb lending. Avnet Inc. of the U.S., the world’s second-largest distributor of electronic components, said it expects more customers in China to delay paying bills.
Some customers in China have requested credit extensions, said Raymond Tsang, Phoenix-based Avnet’s president for the Asia- Pacific region. The company will meet a target of $1.5 billion for Asia sales this financial year, of which as much as 80 percent will come from China and Taiwan, he said.
`China Must Slow’
“Although the electronics industry isn’t a target of the Chinese government’s latest economic measures, it will be indirectly affected in the longer term because we’ve already seen tighter money supply,” Tsang said in an interview in Hong Kong.
Morgan Stanley’s Roach estimates China may cut its annual investment growth rate to about 15 percent from 43 percent in the first quarter.
“China must now slow,” Roach said at an April 26 panel discussion on China’s southern island of Hainan. “The overheating of the economy is very much a by-product of the interplay between excessive bank lending and runaway investment spending.”
To contact the reporter on this story:
James Regan in Hong Kong, or jregan@bloomberg.net

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