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Christine Chan

THE question of whether China can bring its runaway economy under control appears to be a little closer to having a positive answer.

 The economic figures for the first half of the year point to an economy more under control under the government's austerity programme, although worries remain over the rapid money supply growth and the outcome of the autumn harvest.

 The key numbers that have shown apparent progress are the growth of gross domestic product (GDP), fixed assets investment and industrial output.

  If these are now responding to treatment, it will show that the macro-economic measures imposed by the government to rein in credit are taking effect.

  While it is still arguable whether China's economy can achieve a soft landing by the end of this year, there is a consensus that the yearly targets set by the government at the beginning of this year will be met.

  The GDP growth of 10.3 per cent in the first half of this year compared to government targets of between eight to nine per cent.

  China's economy grew 11.6 per cent in the same period last year.

    Smith New Court Far East economist Qu Hongbin said: 'The economy is heading for a soft landing. By that, I mean the economy is under control and inflation is slowing down substantially.'   Inflation indicators such as consumer price index (CPI) and retail price index (RPI) have fallen consistently for the past eight months.

  RPI rose 18.5 per cent in the first six months of this year - still high, but encouraging when compared to the surge of 25.2 per cent in October last year, although also still well outside the government target of 15 per cent for the whole year.

  State Statistic Bureau officials, however, have warned that 'inflation remains a severe pressure', and analysts have doubts about how sustained will be the slowdown.

   Mr Qu, of Smith New Court, cautioned that the lower inflation might be artificial, given that it had been brought about by administrative measures rather than by sound money policies.

   'Price controls and control of food subsidies are temporary measures and the downward momentum of inflation may not be sustainable,' he said.

  Others believed that the economy would gradually slow down to an acceptable level without exerting large shocks to the economy.

  James Capel Asia economist Nicholas Brooks said the Chinese Government had been carefully controlling credit and industrial output.

  'The overall indicators show that the economy is improving,' he said.

  Jardine Fleming Securities economist Daryl Ho Hon-kit said the government had managed to contain inflation, without exerting too much of an impact on the economy.

  He said the gradual easing of the economic growth had reflected the government's efficiency in tightening credit and controlling fixed-assets investment. Fixed-assets investment soared 22.2 per cent to 376.4 billion yuan (about HK$350 billion) in the first six months, which represents roughly half the 37.5 per cent growth recorded in the first half of last year.

  Mr Ho believed the austerity programmes had been effective in tightening credit on the demand side, with fixed assets investments shrinking and the economy cooling.

  Industrial output also showed a downward momentum, with the first six months recording a rise of 14 per cent. A State Statistics Bureau official said the growth pace had 'slowed down a little bit'.

  China's industrial output expanded by 17.5 per cent for the whole of last year.

  However, analysts said the macro-economic policies imposed by the government were not all-powerful.

  'The policies are not perfect, as reflected by the volatile investment growth, which is affected by the occasional administrative instructions from the government,' Mr Ho said.

   Mr Ho said the economic scenario had showed that the measures were effective in bringing the overheated economy to a more controllable level.

  With the targets set by the government being met, concern has been raised over whether the austerity measures can be maintained in the second half of the year.

  Mr Qu said a principal worry in the second half was to keep the rapid growth of money supply down to more reasonable levels.

  The net volume of currency withdrawn from circulation totalled 28.5 billion yuan by the end of June, an increase of 20.1 billion yuan over the same period of last year.

  However, Mr Qu believed that the growth of M2 - known as broad money, and including cash and all deposits - was expanding at a fairly high level of 33 per cent in the second quarter of this year.

  This compared with the target set by the People's Bank of China, the country's central bank, of between 23 to 25 per cent for the whole year.

  Jardine Fleming's Mr Ho attributed the money expansion to the huge trade surplus, the influx of foreign investment and the growing surplus of the balance of payment.

  Also attracting investors' attention is whether austerity measures imposed in July 1993 will have their intended effect and how long they will be enforced.

  'I expect that there will be a relaxation of credit and investment projects in the beginning of next year, assuming that the austerity programmes can be maintained and a reasonable food supply can be achieved,' Mr Ho said.

  He believed agricultural officials were not unduly concerned about the latest flooding in southern China.

  'They are more concerned about the autumn harvest,' he said.

  The autumn harvest accounts for 80 per cent of the total annual harvest. Mr Ho was optimistic that this year's would be normal.



Runaway economy responds