CODE
Reference
The effects
The
5.
As the TUR makes clear, the measures are already starting to take effect. The impact is most pronounced in the most overheated sectors, especially property and construction. FT reported on August 5 that steel and cement prices have dropped 15 per cent in the past two months and property prices are falling. This suggests that, as in the 1989, the slowdown in investment will be much sharper than consumption. Slowing investment also tends to dampen imports, which are heavily capital intensive, allowing the the external sector to make a larger contribution to growth (as net exports increase).
Soft or hard landing ?
6.
Whether the economy is headed for a soft or hard landing is likely to be determined by the path of consumption. In 1989 and 1990, consumption followed investment into sharp decline resulting in a fairly hard landing (Annex 2, chart).
7. We can only speculate about what will happen to social and personal consumption over the current cycle. Personal consumption is by far the most important factor accounting for 85% of total consumption in 1991. Just over half of personal consumption is made by rural residents.
8.
Some measures, like forced purchase of government bonds and raised interest rates will depress personal consumption as they increase savings. Increases in the collection of taxation will also, on balance, depress personal consumption.
9.
One scenario is that the threat of unemployment and rising inflation cuts personal consumption. Alternatively, if output growth remains strong and there is little sign of falling real wages, especially in urban areas, consumption growth could remain fairly strong left largely unscathed by modest increases in taxation and forced bond purchases. Rising interest rates are unlikely to have strong effects on overall savings (hence consumption) unless increases are very sharp in relation to prices - and there is no evidence that the authorities want to use the interest rate weapon other than to keep up with inflation and prevent financial savings from declining.
10.
Social consumption, largely by central and local government, is unlikely to fall substantially in real terms as investment spending is likely to bear the brunt of the announced cutbacks.
Outlook
11.
On balance these observations suggest that China may be able to engineer a relatively soft landing with investment taking the brunt of the growth slowdown. As the TUR indicated the authorities may now wait until November to assess the effects of measures introduced so far.
18-77