China’s economic policy makers will face a juggling act in sustaining China’s FDI export-led growth at 7-8% level while introducing a number of fiscal and financial reforms, according to ING Wholesale Banking (ING).
In a presentation entitled “China’s High Growth Juggling Act” to an EU-China Economic and Trade Cooperation Forum, organized to mark 30 years of political and economic relations between the two trade partners, ING Wholesale Banking forecasts that China is likely to allow a 10% revaluation of the yuan in the next three months, moving the rate to RMB7.45. This would also be accompanied by more intensive dialogue with European Union trade officials to stem the appeals for protectionism that have followed the surge in Chinese textile exports in 2005. The relationship is valuable for both sides. The EU accounted for 15 per cent of China’s trade in 2004, up from 10% in 1995 and EU foreign direct investment in China equals that of the US.
Speaking at the forum, Tim Condon, Head of Research, Asia said, “China’s labor intensive, export-oriented textile and garment industries got a boost in 2005 with the lapse of the Multifiber Agreement. This has triggered global political pressure to limit China’s access to markets and increased calls for China to revalue the yuan. All parties have too much at stake to make a trade war a likely outcome. A revaluation would be in the economy’s best interest as it would also take pressure off property price inflation. But China does not want to be seen to be caving in to outside pressure. We see the Chinese authorities as looking for the right time to reform the yuan exchange rate.”
ING Wholesale Banking predicted that China would see growth of 9% in 2005, driven as in 2004, by investment. There is evidence that China’s rapid investment growth and the resulting high investment rate is associated with a decline in investment productivity. Investment growth will need to slow significantly as the decline in investment productivity will flow through to higher non-performing loans. The economy remains vulnerable to another investment boom, which have in the past been unintended consequences of economic reforms in China’s mixed economy.