- WSJ.com China's Economic Brake May Be Taking Hold August 16, 2006
DOW JONES REPRINTS This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit: www.djreprints.com. See a sample reprint in PDF format. Order a reprint of this article now. China's Economic Brake May Be Taking Hold Industrial Output Logs Slower Growth; World Bank Upbeat By ANDREW BROWNE and ANDREW BATSON August 16, 2006 BEIJING -- China's government said industrial-production growth slowed slightly last month, amid tentative signs that Beijing's efforts to cool the economy may be taking hold. Growth in industrial production, which measures the output of everything from cars to steel, softened to 16.7% in July from a year earlier, compared with 19.5% in June. In addition, World Bank economists in Beijing said they are seeing an impact from the measures the central government has taken. These include a rise in interest rates, two increases in bank reserve requirements -- the amount of money that commercial banks must deposit with the central bank and not lend out -- and new taxes to discourage property speculation. The economists said they don't believe the Chinese economy is overheating. "We think some of the measures are starting to show success already," Bert Hofman, the World Bank's chief economist for China, told reporters as the Washington-based lender presented its quarterly report on China's economy. Chinese leaders, including President Hu Jintao, have signaled concern about overheating since data showed that the economy expanded by 11.3% in the second quarter from a year earlier, its fastest pace in 12 years. Growth remains stubbornly high despite a slew of measures to rein in bank credit and curb investment in everything from factories to highways and bridges. The fear is that runaway investment is leading to a glut of goods that could eventually destroy profits and saddle banks with bad loans. Many economists believe that Beijing will be forced to raise interest rates again -- perhaps after waiting a few months to see whether indications that growth is slowing are just statistical blips or signal a trend. Higher interest rates would further discourage borrowing, by raising the cost of loan repayments. Some economists argue that Beijing will have to allow faster appreciation of its currency if it wants to choke off the inflows of dollars from exporters and speculators that create too much liquidity in China. The
central bank buys up dollars and releases yuan, which in turn are often lent out by banks that have excess cash. A stronger yuan could help to crimp exports by making Chinese products more expensive for overseas buyers in dollar terms. China's fell yuan sharply against the U.S. dollar yesterday, recording its biggest one-day change since Beijing revalued the currency by 2.1% in July of last year. The World Bank economists said China's economy isn't displaying any of the classic symptoms of overheating, such as rapid inflation, current-account deficits or bottlenecks in transporting goods. And their report suggested that red-hot investment -- identified as a danger by Mr. Hu and other top leaders -- may not be the threat it appears to be. That's because enterprises are funding most of the new investment from their own surging profits, rather than from loans. Still, Louis Kuijs, a World Bank senior economist, said there are concerns that some of the investments might prove poorly conceived and later become a drag on the economy and banking system. Also, Mr. Kuijs said the government has so far failed to deliver on a pledge to make economic growth more balanced, more domestically focused and less damaging to the environment. Income inequality and energy use continue to increase, and the major drivers of growth remain industry and exports, rather than service businesses. While noting that economic cooling measures may be taking effect, the World Bank raised its forecast for China's full-year economic growth to 10.4% from 9.5%, reflecting the momentum built up by the country's first-half surge. It was the third time this year the bank has raised its forecast. Despite the forecast's increase, some economists are comfortable that significant signs of slowing exist. Isaac Meng, an economist with BNP Paribas in Beijing, noted a sharp deceleration in growth of auto and steel output as companies cut production to battle decl...