After several years of phenomenal economic growth, China's ruling party has decided to try to rein in this “irrational exuberance” and put the Chinese economy on a more stable growth track.
At least that's the official line. The reality is somewhat more complex as China tries to reduce over-investment in sectors like the steel industry, building materials and construction while putting more money into communications, energy and agriculture, a Chinese consultant says.
“In the first quarter of this year, China's economy grew 9.7 percent, which is well above the official target of 7 percent for 2004,” said Ren (Richard) Yuping, a senior consultant with Yuan Associates in Beijing, who spoke on the “Chinese Credit Crunch” at the World Cotton Quality Summit in Singapore.
“However, China is a market with huge diversity and a closer look shows that excessive growth does not exist in all industries. There have been specific industries that are experiencing excessive growth, while in some of the other sectors the government is still encouraging more investment.
“Even within those industries that are experiencing excessive growth, it is important to distinguish between efficient enterprises and loss-making firms, especially in the textile industry.”
Ren, who worked as an analyst in the Chinese government's Ministry of Foreign Affairs for 18 years, said that on May 13 China's National Development and Reform Commission and other agencies issued a notice outlining the plan for curbing the growth of the economy.
According to the plan, the list of industries that needed “cooling down” included steel, metallurgical, construction, oil and petrochemicals, machinery, light industry, textiles, pharmaceutical and publishing.
But the notice also included a list of sectors that the government believes need “heating up,” according to Ren. “Agriculture is our top priority and cotton and textiles are considered to be part of the agricultural sector.”
Most observers expect China's cotton production will increase in 2004, “depending on weather, of course,” he said. “All cotton growers know weather plays a critical role in cotton production.”
Ren acknowledged that the United States government has been trying to persuade Chinese officials to raise the exchange rate versus the dollar as part of an overall package of higher interest rates and other economic disincentives.
“But as we've touched on already, China's current economic situation is anything but typical,” he noted. “If the Central Bank raises interest rates, it could slow demand in a fast-growing region. But, at the same time, it could also penalize borrowers in areas in need of development.”
Instead, the Chinese government has decided to take another approach “that has served it well in the past,” says Ren. “The approach involves tightening credit and making industry-specific adjustments.”
On April 25, the People's Bank of China raised reserve requirements for all financial institutions for the third time in seven months, and, last June, the PBOC issued a regulation cutting off the availability of financing for real estate loans. Informal “window guidance” has also been issued to slow the expansion of credit.
The Ministry of Commerce has also reduced tax rebates that enterprises can receive from their export business, said Ren. The tax rebates for textiles, for example, have been reduced from 17 percent to 13 percent;
The State Council has also raised the demand for capital-to-cost ratios for projects in the steel, aluminum, cement and real estate sectors.
For the long term, Ren said the Chinese government is not trying to curb investment in textiles as a whole, but is trying to close down “obsolete and wasteful” companies such as the state-owned enterprises.
“The long-term vision involves creating a leaner and more efficient Chinese textile industry, which will be more competitive internationally,” he said. “On the domestic front, the government is trying to encourage the development of high-quality, value-added products designed for its internal use.”
By forcing industry to invest in more efficient production methods, the Chinese government hopes to usher in a new generation of high quality Chinese companies in the textile industry, he said.
“The government is not trying to curb the development of the textile industry as a whole,” says Ren. “It is trying to phase out the obsolete and outdated textile firms and machinery by introducing these kinds of industry-specific measures.”
The May 13 notice from the National Development and Reform Commission, for example, names 28 types of obsolete machinery to be phased out in the textile industry in the next few months.
Tightening credit and weeding out inefficiencies will speed up an already existing trend: the shrinking of the state-owned enterprise sector, which now accounts for less than 15 percent of China's textile production.
For the current year, he said, total revenue for the cotton textile industry is predicted to grow by 24.21 percent, according to figures from the China Textile Industry Statistics Center. Revenue from state-owned enterprises is expected to shrink by 8.35 percent.
“This comes from measures encouraging free enterprise and a market economy,” he said. “That's why the Chinese government has been trying to persuade our counterparts in other countries that China should be recognized as a free-market economy.”
Ren did provide one encouraging note. He said that although Chinese growers are expected to produce 6 million tons or 27.5 million bales of raw cotton in the 2004 season, total mill demand in China is expected to reach 8 million tons or 36 million bales. “That leaves the market undersupplied by 2 million tons (9.2 million bales), which must be supplied by imports.”