How to Control the Overheating of the Chinese Economy

|China

Each year, the Foreign Business Advisory Conference is held in Beijing. This year, it took place on 20th May and the main theme was “The Olympics and Urban Development”. As usual, the Mayor of Beijing, Wang Qishan, gave a speech; in this year’s speech, while he expressed confidence regarding the holding of the Olympics and urban development, he delivered a warning regarding social issues, in a different sense to this challenge. In particular, Mayor Wang voiced truly forthright views regarding deteriorating problems relating to electricity, the problem of water shortages and the inevitable rise in water rates, all of which have been triggered by rapid economic development; moreover, he spoke about environmental issues that arise in trying to solve these problems, including atmospheric pollution and sewage treatment, and the problems faced by agricultural communities, which cannot keep pace with the social changes taking place amidst growing urbanization.

China’s GDP in the first quarter of this year rose 9.7% on the same period of the previous year and fears regarding the overheating of the Chinese economy have recently been highlighted once more. Overinvestment that ignores the forces of supply and demand has spread throughout the country; as a result, electricity shortages, soaring resource prices and other adverse effects have escalated, becoming a challenge for everyday business. There are fears that, if this continues, the Chinese economy itself will collapse like a burst bubble. The epitome of this overinvestment is the materials industry, particularly the steel industry, which underwent what can only be described as abnormal growth of 172% on the previous year. In the electrical industry as well, there is a chronic overstock situation compared with previous years, focused mainly on white goods; even stricken by the escalating price of raw materials of late, producers have been unable to pass this on in the price of such goods and their profits are coming under increasing pressure. In addition, the overheating of the Chinese economy is not merely having an impact on problems within China; its effects on the global economy cannot be ignored either, including the fact that it has caused a global shortage of containers and an increase in transport costs, as well as leading to a steep rise in the price of oil.

The Chinese government is trying to embark upon measures, such as financial restraints, in order to ensure a soft landing for the economy, but it is possible that the bubble will burst in an instant if it makes the wrong move. What is needed first of all is to realize how important it is for the central government to be able to control the unnecessary development investment being deployed by local authorities. At the recent Beijing International Science and Technology Industrial Exposition, although there were booths that focused on high technology, the booths set up by local authorities to attract businesses to development and industry zones were extremely conspicuous.

It comes over quite clearly that each local authority is trying to attract industry with a view to promoting economic development, but in addition to being astonished once more by the sheer number of them, I feel that the issue of how to control the energies of local authorities at the nationwide level is exceedingly important.

In that case, how should we respond to this situation as a single company? We believe that the complementary strategy vis-à-vis Asia that was successful for our company when the SARS problem emerged would work. Our business in China is extremely important and we are reinforcing our Chinese business as a result of our belief that winning in China is vital to our global strategy, but we do not think that we should, under any circumstances, be completely devoted to China. Looking at recent developments, such as progress relating to an FTA, a global hub strategy with a bird’s-eye view is needed, with a Greater Asia strategy for Asia and China as a whole being a particular requirement, from the perspective of risk management.

Might it perhaps not be the case that what is needed is a response that dispassionately analyses the overheating of the Chinese economy as a future risk?

[Translated by ERINA]