08/21/2008, 00.00
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Harsh economic winter to follow Olympics

The Olympic Games have not been an engine of growth for China’s economy. The government has waited before taking the tough decisions in order to contain inflation and avoid popular protests. Now it must face the economy’s structural problems like the rising cost of energy and raw materials and lower exports. Experts look at the issue.
Beijing (AsiaNews/Agencies) – China spent some US$ 43 billion and the better part of a decade preparing for the Beijing Olympics. Now, as people start to realise that this expenditure has had a minor impact on the economy, they are starting to wonder what will happen to China’s economy after 24 August when the Olympic flame is shut off. Dealing with its structural problems had been postponed to after the Games.

Olympic investment represents less than 1 per cent of China's nationwide spending on bridges, roads, and factories last year, and benefited mostly Beijing which is only 3.6 per cent in the national economy.

Investments in sports venues and infrastructure over the period created about 1.5 million jobs, filled mostly by migrant workers who have already been thrown out the city and might find work in other projects like Shanghai’s 2010 expo where cheap labour is in high demand

Rising prices for labour, energy and raw materials as well as a stronger yuan are however putting pressure on big companies in the south, in places like the Pearl River Delta, hitherto more used to flood foreign markets with its cheap products.

China’s economy remains strong, at least it appears so. Gross domestic product growth this year is expected to be 9.9 percent down from 11.9 per cent in 2007.

Exports expanded by 22 per cent in the first half of the year, down from 28 per cent in the same period of 2007 (though they were up a surprising 27 per cent in July). Corporate profits grew by 21 per cent in the first five months of this year, half the rate of the same period of 2007.

Especially worrisome is the fact that the Shanghai stock market lost60 per cent since October after gaining 130 per cent in 2006 and doubling last year.

Today alone Shanghai stocks dropped 2.6 per cent on banks and property. And since the start of the Games it lost more than 10 per cent. This is a sign that few believe in further growth.

In Beijing's central business district one-third of the office space in vacant.

Of course the trend is partly related to the slowdown in the world economy, especially the United States. Americans for example bought about 40 per cent of the country's US$ 23 billion in furniture exports. Now Chinese manufactures are complaining that orders are down and that imports are not even paying on time.

Still “China will not have a post-Games [major slowdown] because the economic fundamentals will not change after the Olympics,” said Wang Yiming, deputy director of the National Development and Reform Commission's macroeconomic institute, because the Olympic spending is but a fraction of the country’s output.

However, the authorities now cannot avoid tackling structural problems.

The government sells oil and energy below cost, keeps the price of many raw materials stable, and provides subsidies and tax exemption to producers. For many this was done to hold down inflation and avoid protests before the Games, but it cannot continue.

State Grid Corp of China, the larger of the mainland's two regional power distribution monopolies, called for an increase in retail prices in tandem with yesterday's tariff rise by electricity producers to help buffer it from severe cost pressures. It is spending a further 73.6 billion yuan on post-winter storm and earthquake grid reconstruction, and has been saddled with hefty interest expenses from its 1.2 trillion yuan (US$ 1.75 billion) investment in grid expansion between 2006 and 2010.

The government “should establish a scientific and sound power pricing system and let tariffs charged to distributors and end-users move together to ensure a healthy industry development,” State Grid said.

The National Development and Reform Commission yesterday raised tariffs that power generators charge distributors by an average of 2 fen per kilowatt-hour or 5.3 per cent, but this is on the whole inadequate. The highest benchmark tariff rise of 2.5 fens was allowed in coastal provinces and regions such as Shandong, Shanghai, Zhejiang and Guangdong where coal prices are the highest. But for experts like Li Xiaolin, a China Power International Development vice-chairman, the tariff rise should have been twice as high just to cover recent hikes in coal prices.

Wang Huisheng, president and chief executive of the State Development and Investment Corporation, the largest state-owned industrial holding company, yesterday said that the government was accelerating sales of non-strategic assets across a wide range of sectors; this means that such companies will have to operate according to market principles and seek to become money making. Areas considered for sale are transport, infrastructure and agriculture; energy and natural resources are less likely to be sold.

However, higher energy and fuel prices and an end to food price ceilings will fuel an already high inflation, which will drive demands for higher wages. If inflation was a worry earlier this year, peaking at 8.7 per cent in February, consumer prices grew by a relatively modest 6.3 per cent in July, but factory-gate prices last month soared 10 per cent last month, which companies will have to pass onto consumers.

Chinese leaders are afraid of inflation, well aware that most of the 80,000 episodes of mass protest that break out each year in China are due to dissatisfaction about the country’s economic prospects in which the interests of big companies and local leaders take precedence of those of ordinary people.

For this reason Beijing knows that it must “rethink” its entire development model. (PB)

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See also
Record rise in production costs, China's economy slows
The first India-Africa summit has opened
Thousands of factories closing in the Pearl River delta
China starts to export inflation
Asian shares up as gold hits record high


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