By Long Guoqiang

I. Slowdown in World Economy

The strong growth of world economy in 2000 is out of people's expectation. Some international organisations and financial institutions recently readjusted their forecast to a higher growth rate of world economy this year. It is predicted by IMF that the world economy will grow at 4.7% this year, the highest in past 17 years. The growth rate of world trade is also expected to reach 10.7%.

Rapid growth of world economy this year is due to the fact that the major economies in the world have been growing well. The US is experiencing the longest period of prosperity since the World War II. It has been the locomotive of the world economy for 9 years. The economic growth in the US is even stronger this year, it is anticipated that the growth rate will reach 5.2%. The drive for the continued economic growth in US is believed to be "new economy", which is characterized by high growth rate, low inflation rate and low unemployment rate. The new economy is a joint result of the corresponding high production rate generated by technological progress, increase of investment in new-tech, flexible capital and labour markets, suitable macro-management, economic globalisation and the fortune effect brought along by the stock market. Although Europe has not completely got rid of the pressure of high unemployment, the economic growth rate has increased from 2.4% last year to 3.4% this year. The growth rate is as high as 8.5% in Ireland, 5% in Finland, 3.5% in France and 3.1% in the UK. Having experienced depression for nearly ten years, the Japanese economy has recovered from the negative growth in 1998 and is expected to reach 1.6% this year, which is 1.4 percentage points higher than last year. The economic growth is attributable to a series of government policies on financing for small and medium-sized enterprises and on individual house purchasing. It is also generated by the rapid growth of IT industry in the world. Apart from Japan, the newly industrialized economies (NIEs) in East Asia have demonstrated a tendency of strong recovery, which is mainly generated by export. The economic growth rate in Asia (excluding Japan) will increase from 6.4% last year to 7.2% this year. The growth rate will be as high as 9.5% in South Korea, 8.4% in Singapore and 8% in China and Hong Kong SAR. The growth rate in Latin America will climb from 0.1% of last year to 4.3% this year.

Despite the fast growth of world economy, however, there exists an internal trend for downward adjustment. The actual output in some developed countries such as Canada and the US has exceeded their potential capacity of output. According to the general rule of economic fluctuation circle, it is time for the growth rate of world economy to move downward to a certain extent. At the same time, with the rise of oil price on the international market, unstability in the world financial market and the uncertainty of economic development of major developed economies, there is greater possibility for a fall of the world economic growth rate. International organisations and famous investment banks have all lowered their forecast for international economic growth in 2001. For instance, IMF predicts that the growth rate for world economy would drop to 4.2% and Morgan Stanley believes it may slide to 3.9%. Despite the differences in detailed predictions of various institutions, it is a mainstream judgement that the growth rate for world economy in 2001 will be lower than this year. It is noteworthy that the growth rate of the world economy in 2001, even though it may likely plunge, will still be higher than the average annual growth rate of 3.6% in the past 30 years.

II. Uncertain Elements to Be Concerned

1. Rise of oil price on the international market

Since OPEC members began to earnestly implement the policy of guaranteeing price by output restriction at the end of 1998, the low price of oil on the international market is gone for good. The price went up, without stopping, from the lowest point of less than US$10 per barrel to top of US$30 and stays, above at present. This rise is a result of both the basic elements of demand and supply on the international market, and some speculation elements. Given the basic elements, it can be seen that demand for oil has increased sharply with the rapid economic recovery of East Asia. Meanwhile, the continued low price of oil led to a decrease in investment in oil production, shipping and refining, which in turn cut the capacity of the above three lines. Insufficiency in oil refining has been, in particular, a "bottle neck" for the increase of oil supply. Therefore, the aggregate supply is insufficient, to some extent, as against the aggregate demand. A more important reason for the rise, however, is the large-scale dealing of international speculative capital on the futures market.

The influence of oil price over the world economy is decided not only by how high the price is, but also by how long the high price remains. The longer the price stays high, the more negative effect it brings about. The total investment of oil companies in the developed countries decreased drastically by nearly 20% in the first half of this year, compared with the same period of last year. Meanwhile, the peak season for oil consumption in winter has started in the Northern Hemisphere. It is not likely for oil price to plunge deeply in the near future. As predicted by concerned institutions, the oil price would possibly fall to around US$25 per barrel by the end of 2001 and then stay at this level for a certain period. Continued high price of oil will generate the following negative effects on the world economy.

Firstly, the major oil import countries are under the pressure of inflation. According to OECD, for every US$10 rise in the oil price per barrel and if the price remains for one year, inflation will consequently rise by 0.5% in developed countries. Pushed by the oil price, the inflation rate of the US for the first 7 months this year was nearly 4%, which was 1.3% higher than last year. Under the dual pressure of oil price hike and depreciation of Euro, the pressure of inflation has obviously increased in the Euro region.

Secondly, with the increased pressure from inflation, it is more likely for the central banks of the developed countries to readjust upward their interest rates. The interest rates in the EU and the US have soared up six times in succession, which will in turn slow down economic development. It is estimated by OECD that the growth rate would go down by 0.25% in developed countries for every US$10 rise in oil price per barrel. Once the growth rates of developed countries decline, the lower growth of import of these countries will in turn affect the developing countries. The East Asian economies are mainly export-oriented and heavily dependent on oil impot, therefore, they suffer the most from the negative effect of the oil price rise.

Would the current oil price rise trigger off a global "oil crisis" as it did before? Seen from the demand of the developed countries, the developed economies have become much less dependent on oil after experiencing the previous three times of oil crisis because they have improved their efficiency in oil consumption, developed substitute energy and shifted their economic structure towards service and high-tech areas. For example, the unit energy consumption of GDP in the US is only 40% of that in 1973. The proportion of global oil consumption to world production value has eased to 1.5% from 7% in the 1980s. On the other hand, the current oil price is only half of that in 1981 during the oil crisis and two thirds of that in 1990 on the basis of comparable prices. No crisis as serious as in the 1970s is expected unless the oil price rockets to US$70 per barrel. Therefore, the current oil price rise is unlikely to lead to global economic recession, although it would bring along negative effect on world economic growth.

2. U.S. economy: "soft landing" or "hard landing"

The US economy has been gearing up at a high speed for 9 years in a row. Uncertainty in the US economy is, too, increasing at the same time. Prediction on the slowing down of the US economy is strong. In recent years, people have been warning on the possible slowdown of the US economy, but it has kept growing fast to the surprise of everyone. As a result, some people take it easy in face of the US downward readjustment signalizing another warning message of "the wolf is coming". It is true that elements that supported the economy in the past, such as increase in investment and labour productivity brought by the revolution in information technology, flexible labour market and suitable policies on macro economy management, will continue to take effect.

However, some indices in the US economy have changed substantially and uncertainty has greatly increased. Therefore, special attention should be paid to the development trend of the US economy.

a) The unfavourable balance in the US current accounts has increased by a big margin, the proportion of which in GDP has more than doubled from 1.75% in 1997 to 3.75% in 1999 and registered a new record of 4.25% in the first quarter of 2000. That is why people have a much stronger prediction on depreciation of the US dollar.

b) Deposit rate of US families has tumbled heavily to 0.2% this year from 2.2% last year and recorded a new low in history. Investment relies heavily on inflow of overseas capital.

c) Unemployment rate is the lowest in the past 30 years, and cost of labour keeps increasing.

d) "Core inflation rate'' which excludes oil and food keeps rising to reach 2.4% this year.

e) The excess of actual GDP over potential GDP has increased rapidly from 0.2% last year to 1.9% this year.

In the meantime, impact from oil price has intensified the expectation for higher inflation and basic interest rates. On the other hand, actual profit realised by companies is much lower than expected, which has led to the dive of indices on the stock market. As a result, "fortune effect" which has supported strong consumption demand in recent years will be weakening.

The rise of oil price and fall of the stock market have not only affected the actual economic operation, but have also, to a larger extent, generated negative effect on people’s psychological expectation. The confidence index for American consumers plunged by 7.3% to 135.2 in October from the previous month.

The fluctuation of the internal indices of the US economy shows that the economic circle in the US has an internal demand for downward adjustment. According to the latest data, the economic growth in the third quarter this year was only 2.7% in the US, which was much lower than 5.6% in the previous quarter. In addition to the unfavourable trend of the economic circle, external influences such as oil price on the international market will give rise to further negative impact on the US economy. Based on the above analysis, some institutions have announced their warning that the growth rate of the US economy would likely slow down in 2001. It is predicted by IMF that the growth rate of the US economy would sag from 5.2% this year to 3.2% next year. Likewise, Morgan Stanley forecasts that the growth rate is expected to fall from 5.3% this year to 3.4% next year. Meanwhile, Morgan Stanley warned that the US dollar might depreciate and the US stock market would tumble.

Despite the general opinion that "hard landing" of the US economy is not so certain, international organisations have pointed out that the possibility dose exist for "hard landing" in the event of crash of the US capital market and drastical depreciation of US dollar as a result of capital outflow in large amount. Once such circumstances occur, according to IMF prediction, the growth rate of the US economy would ease to 1.3%, and the growth rate of the world economy to 3.1%.

III. Influence on the Chinese Economy and Suggestions on its Elimilation

1. The slowdown of the world economy, especially that of the US economy, will have negative affect on China's export.

The US is a major export market for Chinese products. China's export to the US accounted for 23.5% of its total export for the first three quarters of 1999. The US is the destination market for a large part of China’s export to Hong Kong. According to some American statistics, export of Chinese products to the US (including those via Hong Kong) made up 42% of China’s total export in 1999. The proportion is around 38% if the value added by processing in Hong Kong is excluded.

Past experiences have shown that slowdown of the US economy will lead to a fall of its import, which would in turn reduce China's export to the US. Since the 1990s, the US economy has undergone two times of dramatic plunge. The first one last from the beginning of 1989 to the beginning of 1991 when the US economy stayed sluggish for eight quarters in succession with its growth rate diving sharply from 4.3% to –1.3% and the growth rate of import from 8.6% to –1.0%. The growth rate of import from the nine Asian economies decreased from 9.8% to – 0.9% while import from China decreased by 16 percentages from 41% to 25%. The second recession extended from the third quarter of 1994 to the fourth quarter of 1995 when the growth rate declined for five consecutive quarters, dropping from 4.3% to 2.2%. The growth rate of its import in the same period dropped from 15.1% to 6% and that of its import from Asian economies from 19.1% to 13.4%. China’s export to the US went down from 23.2% to 17.5%, losing 6 percentages. 11 The above figures are worked out according to statistics of the US.

Should the growth rate of the US economy decrease by a big margin as predicted by the above-mentioned institutions, its impact on China’s export would be heavier than ever, which is due to the following factors:

Firstly, during the first time of slowdown of economic growth in the US, RMB was experiencing depreciation for two consecutive years by a margin as big as 41%. During the second period of slowdown, China was implementing a new tax refund system for export as well as unifying the double-truck foreign exchange rates, when the official exchange rate fell sharply by 50%. All these offset, to certain extent, the negative impact of the slowdown of the US economy on China’s export. Nevertheless, the growth rate of China’s export to the US still decreased by 16 and 6 percentages respectively in the two periods. The exchange rate of RMB now remains stable. The tax refund rate for export has reached 15.5%. Therefore, there is very limited room for more favorable policies to encourage growth in China’s export. According to past experience, China’s export growth rate to the US is likely to register a remarkable fall next year from 28% for the first three quarters of this year.

Secondly, compared with historical record, the structure of China’s export products has changed a great deal, the machinery and electronic products have become the biggest exports, accounting for 41.8% of the total. In contrast to traditional labour intensive products such as textiles and light industrial products, machinery and electronic products are more sensitive to fluctuation on the international market. For instance, the export of computer and telecom products shot up by 62% for the first three quarters this year because of a strong international demand for IT products. With the economic slowdown in the US next year, the demand for electronic products would weaken noticeably, which would in turn cast significant effect on China’s export of electronic products, and consequently, the export will slowdown as a whole.

As the final market of China's export products, the US enjoyed a 24.5% share of China’s export in 1990, 30.6% in 1995 and 42% in 1999. Since China relies increasingly on the US market for export, the decrease of US import as a result of the slowdown of its economic growth would bring along an ever more serious impact on China’s export and economic activities.

The "two-high" of both import and export of China this year played an invaluable role in ensuring the 8% growth of GDP. Imports of energy and basic raw materials in large quantity made up for insufficient domestic resources and provided strong support to expand domestic demand. International heavy demand makes the world market favorable to China’s surplus production capacity. Fast increase in export also promoted technical innovation and investment in equipment in labour intensive industries. Next year is the first year of the new century as well as the first year of China’s Tenth Five-year Plan period. It is therefore all necessary to maintain a high economic growth rate. So long as proactive financial policies are continued next year, the demand for domestic investment will drive on import to a high rate.

However, the slowdown in the growth rate of the world economy, especially the US economy, would make the international environment less favourable to China’s export in 2001. Moreover, the statistical elements backing China’s fast growth in export this year will no longer exist next year. The situation of China's export won’t be optimistic next year. The growth rate would be apparently lower than this year and the foreign trade surplus would be slightly lower than this year. All these are expected to have negative impact on China's domestic economic growth. Under such circumstances, it is necessary to maintain stable export policies including the tax refund and at the same time to crack down severely such criminal activities as fraudulence for tax refund and unlawful retention or procurement of foreign exchange.

2. A strategic oil reserve system must be set up to cope with long-existing pressure from import of oil.

Oil is of strategic importance. The disparity between oil supply and demand is a tough issue in China which has been a net import country since 1993. The oil import for the first three quarters this year was as high as 52.02 million ton at the cost of US$10.5 billion, rising 91.9% and 242.5% respectively against last year. It is estimated that oil import for the whole year would top 700 million ton at a cost of US$13 billion. The increase of oil import for the first three quarters represents 16% of the total import increase and 30.6% of the total increase in import of general trade. In other word, import of oil contributed 6.2 and 15.7 percentage points respectively to the growth rate of total import and import of trade.

The rise of the world oil price and the sharp increase of China’s import will demonstrate their impact on economic operation as well as oil import system. On the one hand, heavy oil consuming industries such as aviation, railway and road transportation have already encountered high pressure in terms of cost. As a basic product, oil will transfer the effect of price rise to products at the downstream and push up the general price level. On the other hand, defects in China's oil reserve system and import system are fully seen from the fact that its oil import doubled when the oil price stayed high on the international market.

From a long-term point of view, China is a country with relatively small oil resources. Per capita oil resource and production in China are only 18% and 21% of the average figures in the world. It is expected that domestic demand for crude oil would climb to 243 million ton in 2005, 296 million ton in 2010 and 360 million ton in 2015. If no inspiring discovery or big technological progress is made in respect of oil exploration, domestic crude oil production could only maintain at a level ranging from 165 million ton to 170 million ton. China’s dependence on oil import is likely to go up to 32%, 43% and 53% respectively. The developed countries, having experienced several oil crises, have increased their efficiency of energy, decreased their dependence on oil and established a system of huge oil reserve for strategic purposes. China has not yet set up such a system. The turnover capacity of oil storage of concerned enterprises is limited and can only meet production for one week or more, which marks vulnerability of oil supply in our country. Therefore, while looking for substitute energy and raising oil efficiency, China needs to set up a system for strategic oil reserve to ensure energy security and withstand any impact from oil price fluctuation on the international market.

Department of Foreign Economy Research

November 2000