By Xing Zhiming (China Daily)
Updated: 2008-03-10 10:23

Last year, China's trade surplus hit $262.2 billion, up 47 percent from 2006. "But in the fourth quarter, the growth rate slowed down sharply," says Xu Xianchun, deputy head of the National Bureau of Statistics (NBS). As foreign demand is expected to decline this year as a result of the global slowdown, the growth rate could drop even further, Xu says.

The authorities have reaffirmed that they will continue to tighten the monetary policy this year. As the US Federal Reserve has cut interest rates and hinted at further reductions if necessary, the policy option for China to raise interest rates has been substantially constricted.

Economists say the country may still raise the rates two or three times this year to cushion against rising inflation, which hit 7.1 percent in January, and ask commercial banks to keep more money in reserve. Moves like these will mop up the excess liquidity swirling in the market and raise the cost of capital for enterprises.

International oil prices are also expected to increase domestic enterprises' costs of operation. According to a previous Asian Development Bank estimate, every $20 rise in crude prices will shave off about 1 percentage point from China's economic growth. The bank's assistant chief economist Frank Harrigan says that when international crude prices rose from $68 to $85, the Chinese economy slowed down by about 0.9 percentage point.

Another uncertainty stems from the new labor contract law, which took effect from January 1. The law, which aims to better protect labor interests and smooth labor-capital relations, ensures employers pay for overtime work and buy labor-related insurances for employees or sign formal contracts with them. It stipulates that employees who have worked for more than 10 years will be entitled to open-ended contracts. To save costs, many small companies do not provide such benefits to employees.

"The law may not push up inflation, but will probably affect employment and profit levels of enterprises," say Ha Jiming and Xu Jian, economists from the China International Capital Corp.

In recent years, shortage of labor has pushed up labor costs by 10-15 percent in Zhejiang and Jiangsu provinces, they say. The new law may add another 10-20 percent to staff salaries. Small and medium-sized enterprises in labor-intensive sectors are more likely to be hit harder, they say.

The legislation has come at an "unfortunate" time, according to Chen Xingdong, chief economist of BNP Paribas Peregrine Securities in Beijing. Chen says the economy may be entering a declining cycle this year, which will drag down enterprises. "People are no longer that confident in the economy."

The Chinese economy has galloped at a double-digit rate for five consecutive years since 2003. Based on previous experience during the 1992-96 period, when the Chinese economy also achieved five-year, double-digit growth, the peak occurred in 1996 before the economy started to edge down, says Xu Xianchun of NBS. "It is reasonable to believe that last year is the peak of this round of strong growth as well."

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