Soft landing is China's focus
 |  Bank credit is a factor behind China's high-speed growth recently. |
|  VIDEO |
 China warns the U.S. against meddling in Hong Kong affairs.
 PLAY VIDEO
|
|
(CNN) -- As Chinese Premier Wen Jiabao undertakes his landmark visit to Europe this week, attention at home is on the need to cool China's red-hot economy.
Just before Wen left Beijing for his 10-day visit to Germany, Belgium, Italy, the UK and Ireland, he pledged to take "forceful measures" to deliver a soft landing for the economy, which grew at 9.7 percent in the first three months of 2004.
Some observers believe this could mean an interest rate rise next week, at the end of the week-long shutdown which began with Monday's Labor Day holiday.
China's benchmark one-year lending rate is 5.31 percent. Any rate rise by the central People's Bank of China would need the approval of the State Council.
Geoffrey Barker, Asia Pacific chief economist for HSBC in Hong Kong, told CNN Monday that a rate rise was likely to be a last resort.
He said the Chinese authorities were already targeting credit control to specific industry sectors, and ought to be able to cool the economy with these measures.
Steven Xu, chief economist for ICBC Asia in Hong Kong, told CNN earlier on Monday that much of the over-heating in China's economy came from over-investing in what he described as "trophy properties."
That view is shared by Morgan Stanley's chief economist in Hong Kong, Andy Xie, who says a "vast property bubble" centered on the cities of Shanghai and Beijing is driving the current investment boom.
In a recent commentary he warned of "horrific financial losses" from these investments when the bubble bursts.
He said China's central bank understood that slowing the economy was necessary to contain the losses from the bubble, which was becoming bigger than the one between 1992-94.
Xie said the central government was fighting a battle to maintain stability. Eight months of mild monetary measures had not been effective and now Beijing was being forced to take drastic measures to bring the economy in for a soft landing -- a landing that was by no means assured.
China's economy grew 9.1 percent last year, and although the 2004 full-year outlook is for about 8 percent, the red-hot pace in the first quarter shocked market observers.
Along with the massive surge in fixed asset investment -- a 43 percent year-on-year jump -- the issues facing China include resurgent inflation due to unchecked expansion in money supply and bank credit.
``We need to take effective and very forceful measures to resolve those problems as soon as possible,'' Premier Wen said last week.
Arthur Woo, a Hong Kong-based economist with HSBC, has downplayed concerns that a tighter Chinese monetary policy would trigger interest rate rises across Asia.
He said in a commentary on April 30 that this fear appeared unjustified, and any tightening in China was a "necessary evil" because of the risk of a hard landing.
Woo said that while inflation has returned in China, it was not a particular problem for the rest of Asia.
In Xie's view, China's investment cycles always overshoot because the country's financial system is not market-based and does not know how to price cyclical risks.
In addition, corruption in the financial system makes risk pricing "almost impossible."
"China must marketize its financial system and make the central bank independent to moderate China's economic cycles," he said in a commentary on April 29.
He also urged Beijing to make reform of its statistics system a top priority, saying a market economy could not afford inaccurate and misleading economic data.
As part of normalizing its economy, China should transform the banks into "profit-motivated business organizations", he said. The high level of non-performing loans at Chinese banks meant the country's economic growth had been expensive.
Yuan reform
|  Wen began his German visit with a tour of an auto factory. |
| | CHINA'S FAST PACE | GDP GROWTH
2002: 8.0 percent
2003: 9.1 percent
2004: 7.7 percent (est.)
2005: 7.2 percent (est.)
Source: World Bank, April 2004 |
|
On the currency front, Wen said last week that the economic pressures meant China would need to tread softly in reforming the yuan. Any sudden changes would threaten global growth, he warned.
China keeps the yuan in a tight trading range at about 8.28 to the dollar.
Critics in Europe and the United States argue that the yuan is artificially weak and this gives Chinese goods an unfair competitive advantage.
"If we change the system rashly, it will certainly bring unpredictable problems to the domestic economy, and at the same time could affect the financial stability of the region and even the world,'' the Chinese premier said last week.
Analysts have said China may move on the currency towards the end of this year, and officials have said they are studying the possibility of pegging it to a basket of currencies, a measure somewhere in between an outright revaluation and a modest widening of the trading band.
On the business front, boosting two-way trade with Europe is a high priority for Wen during his visit this week. Bilateral trade currently stands at about $126 billion a year. (Full story)
German automaker Volkswagen announced plans for a new Shanghai factory Monday as Wen began his four-day visit to Germany with a tour of an auto factory in the Bavarian city of Ingolstadt. (Full story)
Getting the European Union to lift its 15-year-old arms embargo on China is another priority for Wen. (Full story)
