Chinesepod - Too high, too fast

BIZCHINA / Review & Analysis

Too high, too fast

(China Daily)
Updated: 2007-04-20 10:07

These days Chinese financial analysts tend to sound like poets. Almost
everyone is quoting the lines from Song Dynasty poet Su Dongpo
(1037-1101):

How I wanted to ride on the wings of wind

To the jade moon palace if only I could bear

The unbearable cold in the high air.

Indeed, who would not feel a little dizzy as both wings of the economy -
the GDP and the stock market index - are flying to ever higher altitudes?

The National Bureau of Statistics announced yesterday that China's GDP
growth was 11.1 percent in the first quarter, as opposed to the
government's target of 8 percent for the whole year. The first quarter's
booming growth already makes it hard to bring the yearly growth rate down
to the desired range.

At the same time, the trading in stocks remains intense. The Shanghai
Composite Index is approaching a level few dared to imagine half a year
ago.

Of course, every economy yearns for growth. Whether or not the economy
can stick to its growth target is not crucial so long as it can hold
steady.

The latest Chinese figures might have appeared perfectly healthy had they
not set off some alarm bells. In fact, unhealthy signs are already
building, such as the ever higher property prices, which never really
slowed despite government measures; and the consumer price index (CPI),
which climbed 3.3 percent year-on-year in March, exceeding Chinese
economists' alarm line of 3 percent.

The cause of so much rapid growth is the rush of investment money - an
over-supply of liquidity, as economists call it. It is driven by both the
continuing attraction of China-based manufacturing operations and the
awakening fervor to profit from Chinese stocks.

At this point, it is not hard to say what the government should do.
Plenty of observers say that China should slow down the speed of its
growth in every category.

At the very least, the government may cool down the exuberance of the
stock market by introducing a capital gains tax as proposed by experts.

For the long-term spread of risk, as more companies qualify to go public
on China's stock exchanges, investor choices will be increased. This will
reduce the existing predominance of financial services and the energy
industry among domestic stocks.

(For more biz stories, please visit Industry Updates)

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