China's Growth Rate Revised Upward, Heightening Concerns About Overinvestment, Trade Surplus, and Environmental Destruction

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In its Asian Development Outlook 2006 Update, launched on September 6, the Asian Development Bank (ADB) revised upward its economic growth forecast for China for 2006, from 9.5 percent to 10.4 percent. The Bank also projected full-year growth for 2007 at 9.5 percent. With China’s fixed-asset investments (investment in long-term tangible property that is not expected to be converted into cash for at least one year) and foreign trade rising dramatically, the nation’s gross domestic product (GDP) grew by 10.9 percent in the first half of this year, building on the 9.9 percent growth in 2005.

Even with Chinese government initiatives to cool the economy, such as increasing key interest rates and other administrative controls, ADB experts expect only modest economic deceleration in the second half of 2006. “Our concern is that if the current investment boom continues, it could result in chronic overcapacity,” noted ADB chief economist Ifzal Ali at the launch of the new report.

The updated ADB assessment says that China’s fixed asset investments surged by 29.8 percent in the first half of 2006, as the investment rate began to climb again in the second half of 2005. Exports and imports grew by 25.2 percent and 21.3 percent year-on-year, respectively. With the gap between export and import growth widening, the Chinese trade surplus grew to US $61.4 billion in the first half of 2006, reaching a record trade surplus for the third straight month in July, at $14.6 billion, according to the Beijing-based customs bureau.

While the ADB report heightens concerns about overcapacity and the possibility of a painful pullback of economic activity driven by booming investment, the issue of whether to curb investment in China has aroused furious debate among domestic economists. Some experts stress that the government must be wary of investment controls and avoiding braking too hard. According to Xinhua News Agency’s Economic Observer, the current share of foreign investment in China’s GDP is 14.8 percent, far lower than the global average level of 21.7 percent. More than 70 percent of the world’s foreign direct investment (FDI) resides in industrial countries: in 2005, global FDI reached $897 billion, $573 billion of which flowed into industrial countries, according to United Nations data cited by Xinhua News Agency.

Although Chinese authorities are trying various initiatives to slow economic growth, the new report also points out that a disruptive deceleration could be very risky, as creating jobs and reducing the widening income gap, both of which require sustained growth, remain high domestic priorities.

The update also heightens rising concerns about environmental degradation and low energy efficiency in China. It warns that the nation has taken on heavy pollution costs with its economic boom, as GDP growth has been driven largely by heavy industry. The report calls for cleaner energy technology and stricter monitoring to tackle the problem.

The ADB update projects overall growth for the 43 countries of developing Asia to be 7.7 percent in 2006, slightly higher than the April estimate of 7.2 percent.