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China Economy Slows Down - 2004-07-19


Economists say China's economy is showing signs of slowing down, but the government should be able to avoid causing a slump. The latest official figures say China's economy had grown by 9.6 percent from April through June. That is two-tenths of a percentage point less than in the first quarter of 2004.

The Chinese government is working to gradually slow the economy, to keep it from overheating. Beijing has been restricting investment in high-growth sectors such as aluminum and steel production, and on the automotive industry.

Economist Andy Xie, with the investment bank Morgan Stanley in Hong Kong, says that while he does not fully trust the official figures, he sees indications that the government's plan may be working, at least in the targeted sectors.

"The Chinese economy at this point is still growing very rapidly, but is beginning to slow," says Mr. Xie. "It's still hard to say."

Among the main concerns is inflation. Because of rising demand, consumer prices have shot up between three and five percent over past year and there is concern they will continue to mount. Inflation is of particular concern to the governing Communist Party, because rapidly rising prices for food and other necessities can lead to public unrest.

Some economists are optimistic that slowing the economy may help keep prices in check.

China has been one of the world's fastest growing economies over the past few years. But with the rapid growth has come what economists term over-investment. Investors have been pouring so much money into putting up factories and buildings that analysts are predicting an eventual glut. Mr. Xie, like many other economists, predicts this could send prices tumbling. "Inflation is quite high at this point but I believe that over time it will [subside] because China has overinvestment so that will cause prices to go down," he says.

Mr. Xie says perhaps a bigger problem will be the rising number of bankruptcies that normally accompany slowed growth. He says China's ailing banking system will likely be hit with more losses from bad loans made in recent years to insolvent state-owned enterprises for construction projects.

The government walks a fine line between slowing the economy just enough to avoid overheating, and braking so hard that the economy slumps and jobs are lost. There are tens of millions of unemployed people in China.

Many economists are confident the government will be able to safely slow the economy. Some speculate that growth will not be allowed to dip below seven percent - the level some economists think is required to create new jobs. This optimism is reflected in plans by foreign automakers and high-technology companies to pour billions of dollars into their projects in China over the next few years.

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