Breathing fire into a year of hope

A stamp released to mark the start of the Year of the Dragon in China has caused a minor controversy, just as most people are busy stocking up ahead of their celebrations.

Instead of showing a benign and friendly creature, as Chinese dragons are traditionally seen, the stamp depicts a fearsome monster more akin to the fire-breathing creatures of western mythology.

And it is not the only scandal to have erupted in the run-up to the lunar new year, which begins next Monday.

An online system for booking train tickets has been overloaded, forcing many to join the never-ending queues at station ticket offices instead. This is a serious issue in a country where most of the 200 million migrant workers will be heaving themselves and many of their possessions on to buses and trains so they can return to their home provinces.

China may have invested tens of billions of yuan on high-speed trains, but such is the movement of people across the country in the face of fast-paced but uneven economic development that at times like this the system struggles to cope.

In a more positive sign linked to the continued advance of the world's second-largest economy, the shops appear full as householders stock their shelves with the fine foods people eat to celebrate the new year.

It is a positive sign as Beijing looks, during the Year of the Dragon, to further tilt the economy towards a dependence on domestic consumption rather than exports.

According to Stephen Ching, an assistant professor in the school of economics and finance at the City University of Hong Kong, this is the key challenge for this year, although he is not especially optimistic that China will succeed.

"I think the signs are not clear for an increase in domestic consumption. Wealth is an important factor, but both the stock market and the housing market performance is not good," he says.

"In terms of wealth level, we don't see a major increase. If there's not a major increase in the wealth level, increasing the domestic demand is not going to be easy."

On the other hand, a housing market not growing this year because of government measures aimed at cooling the sector could help to stimulate domestic demand as well as work against it, believes Li Cui, the chief China economist for Royal Bank of Scotland.

"The wealth effect of housing on Chinese consumption is mixed," she says. "People who have houses probably feel poor, and spend less, but people who don't have houses will have to save less. That will help to boost consumption."

The four successive months of house price falls in major cities that rounded off last year could, however, have implications beyond an influence on domestic consumption. Some commentators have seen that run of price declines as an ominous herald of a full-scale downturn.

Yet for all the doomsday scenarios, others such as Ms Li do not believe the situation is a cause for significant concern.

A key difference between the Chinese property market and that of a country such as the US is that only a minority of homeowners in China have gone into debt to fund their purchases.

For those who do take out mortgages, the loan is typically less than half the value of the property, so even with significant price falls, it is unlikely that many owners will end up in negative equity.

Continuing the upbeat tone, an HSBC report looking at Asia's economic prospects for this year is broadly optimistic about China.

The bank acknowledges that there are challenges, not least that while inflation is easing, growth is also slowing, especially with the downward pressure that property price falls are creating.

Yet HSBC expects the policymakers in Beijing to wield certain monetary and fiscal tools to ensure there is no significant slowdown, and it predicts these efforts will largely be successful.

Last month the central bank cut bank reserve ratios from 21.5 per cent to 21 per cent, and further cuts are expected as part of quantitative easing to maintain credit growth, a key factor in ensuring that overall growth remains robust.

With a low fiscal debt to GDP ratio of about 2 per cent, Beijing has plenty of room to offer tax cuts to promote growth, HSBC says. There is also scope, thanks again to the strong fiscal situation, for more spending on public housing.

When these factors are added up, a prediction of 8.5 per cent economic growth for the coming year emerges, despite factors such as weaker external demand. Ms Li suggests the same figure.

"Growth is going to moderate from 2010, because exports won't be doing too well and investment in [the property] sector is going to be limited, but it matters less for the economy than in 2008. Growth is going to hold up," she says.

China's reduced dependence on external demand and the need to avoid ovestimulating the economy mean, according to HSBC, that a repeat of the 2008-2009 stimulus package is not likely.

Ms Li says some commentators have been "too optimistic" that the problem of high inflation from last year has been solved. She believes that as a result of the continued threat of inflation, the authorities are not in a position to loosen monetary policy.

"They're just going to hold tight and see what happens," she says. "If external conditions, especially in Europe, stabilise, they're just going to continue with their current policy, this being relatively expansionist fiscal policy but a more neutral monetary policy stance."

It seems most analysts believe China's economy is set for continued growth over the coming 12 months, even if the double-digit expansion the country has enjoyed is receding further in the rear-view mirror.

One might say the economic outlook for the Year of the Dragon is benign, which, appropriately enough, is a word sometimes used to describe Chinese dragons themselves.

business@thenational.ae