China still on course for hard landing
WITH three-quarters of the calendar year gone, China looks like recording its third year of 12 to 13 per cent growth in 1994. But the economic success will come at a tremendous cost - more than 20 per cent inflation.
Having averaged nine per cent Gross Domestic Product (GDP) growth in the 10 years to 1991, China recorded 12.8 per cent growth in 1992, 13 per cent last year, and now looks like going close to repeating that figure this year.
At the same time, inflation has sky-rocketed, rising from the low single-digits of the austerity years of 1990 and 1991, to the potentially hazardous mid-20 per cent levels now being experienced.
Gone are Beijing's confident forecasts of less than a year ago of about 10 per cent growth and inflation. These have been replaced by forecasts of 11 per cent growth and 15 per cent inflation.
Both substitute forecasts are likely to be surpassed by the end of the year.
While such rapid economic growth is to the benefit of China - and tangentially to Hong Kong as the external economy with most to profit from mainland growth - the continuing high inflation rate is becoming a very real concern.
As this column has pointed out before, no country in Asia which has doubled its GDP in a decade has failed to double it in the following decade too.
Looking back over the last 20 or 30 years, it is also true that no fast-growing economy in the region has been able to sustain double-digit growth with high inflation for all but very short periods.
Far more common are periods of very rapid growth with relatively low inflation, followed by periods of higher inflation but with less rapid growth.
Where rapid growth (about 10 per cent) and high inflation (over 20 per cent) have coincided, it has generally been short-lived and with adverse consequences.
Perhaps the examples closest to the current experience of China are, first, China itself (in the 1987 to 1990 period) and, second, South Korea, especially in the early 1960s and early 1970s.
China in the late 1980s experienced a short spurt of very rapid growth and high inflation (over 20 per cent), followed by an austerity programme that resulted in a dramatic economic slowdown and inflation falling to about three per cent.
The experience of South Korea in both the 1960s and 1970s was similar, although for quite different reasons.
In South Korea, very fast growth with very high inflation lasted only a few years, and in each case was followed by a dramatic slowdown in the economy.
One positive lesson from these examples is that both economies rebounded from their slowdowns very quickly as confidence was restored.
Another positive aspect of the South Korean experience - one from which China may gain some insight, and indeed may have already done so - is that relatively high growth of about 10 per cent and inflation in the range of 10 to 15 per cent may be compatible in a fast-developing economy.
Certainly, in their forecasts, the mainland authorities seem only too aware of the consequences of sustained growth and inflation rates around these levels - hence the forecasts of 15 per cent inflation and 11 per cent growth.
The problem is these forecasts are still being exceeded, especially on the inflation front, and experience suggests the question of a soft or hard landing for the economy must be an open one, with a harder landing still the more probable.