Expert Forum 1

China Urgently Needs to Construct New Equipment of Ethanolamine

In the end of 1990s, China realized the industrial production of ethanolamine through introducing the production technology and equipment. While the supply of ethanolamine can't meet the demand of domestic market, large ethanolamine needs to be imported all the time.

In 2005, there were about 10 ethanolamine manufacturers in China with the total capacity 56,000 tonnes, while the output was about 30,000 tonnes and the apparent consumption volume was as high as 116,500 tonnes. The large gap between output and demand has to be filled up by importation ethanolamine.

The main reasons for production and demand gap are listed as follows:

•  Behindhand production technology

Most of Chinese manufacturers can't produce high quality ethanolamine because the production technology is behindhand. For example, the color of ethanolamine produced by some domestic manufacturers is so bad that it can't meet the requirement of cosmetic production.

•  Most of small-scale and middle-scale manufactures stop the production

Most of small-scale and middle-scale manufactures stop the production or stay in semistagnation due to their bad quality of ethanolamine and high production cost. Their ethanolamine has no competitive advantage in the market.

•  The supply of raw material

The raw material, namely, ethylene oxide, is far away from the production base of ethanolamine and need to be transported. This restricts the development of ethanolamine production.

•  Large demand of ethanolamine

Most of ethanolamine is used in surfactant, pharmaceutical, polyurethane, rubber chemicals and so on. With the fast development of downstream industry, the output of ethanolamine can meet the large market demand.

Therefore, China urgently needs to construct new equipment of ethanolamine. For example, Fushun Beifang Chemical Co., Ltd. will plan to expand their production capacity of ethanolamine to 50,000 tonnes as of 2010.

Expert Forum 2

Interest Rate Hike a Plus, but More Should Follow

The People's Bank of China has decided to revise upward the bank interest rate, effective August 19.

The interest on one-year bank deposits, for example, has been upped by 0.27 percentage points, from 2.25 per cent to 2.52 per cent. At the same time, the interest rate for one-year loans is also up by 0.27 percentage points, from 5.85 per cent to 6.12 per cent. The interest rates of long-term savings and loans are pushed up by larger margins.

The interest-rate hike is aimed at braking the runaway investment in fixed assets and slowing down the pace at which bank loans expand. All this, in turn, is expected to bring down soaring real estate prices. Ultimately, the measures are hoped to lead investment and bank loans into a reasonable channel, offer guidance to enterprises and bank institutions in terms of their expectations for returns from their investment and get the volatility seen in the domestic financial market under control.

Though a bit late, the current rate increases are still welcome, as they are among the best instruments for co-ordinating and regulating the economy on a macro basis.

Superficially, the country's financial landscape seems to be marked by excessive fixed-asset investment, over-expansion of bank loans, the abnormally fast-increasing trade surplus and high consumption of energy resources. All this finds expression in high-degree volatility in the domestic financial market.

In view of these phenomena, the central bank tried to bring down the degree of this kind of volatility via directive-command methods. But the central bank has now realized that the root cause of the volatility lies in the low interest rates. Only with interest-rate hikes as the departure point can the overheating fixed-asset investment and runaway bank loans be effectively controlled.

The world's mature market economies also have macroeconomic problems. But all their central banks have to do is apply the leverage of interest rates. The Federal Reserve of the United States, for example, has introduced 17 interest-rate increases since June 2004 in its macroeconomic co-ordination and regulation.

The Chinese central bank, too, started to increase the interest rate at roughly the same time. But there have been only one and a half interest hikes. The "half" refers to the fact that the interest rate of one-year bank loans was raised while that of one-year bank deposits remained the same. How could we expect that kind of "fine tuning" to have any impact on the domestic financial market?

In the context of financial globalization, which makes the world's countries increasingly closely associated with each other, the central banks in all nations, developed and developing alike, co-ordinate and regulate their economies by raising or lowering interest rates. Their common efforts in this regard have combined to put in place a channel through which interest rates in the global financial market keep rising. We have seen, for instance, interest-rate hikes in Britain, the euro-zone countries, Japan and the Republic of Korea.

By contrast, the Chinese central bank opted instead for command methods, largely ignoring the interest-rate leverage. This may explain why macro-regulation in the country has failed to achieve desirable results so far.

In the scenario of low interest rates, allocation of monetary resources cannot help but be of low efficiency. This is because the lower the capital's price is, the less efficient monetary resources allocation becomes. When the interest rate is zero, the return from the capital is also nil.

Furthermore, in a unified monetary market, price leverage is the most effective instrument in dictating the behavior and conduct of enterprises and individuals. In other words, this is the way in which the local governments and other non-market actors have the least sway.

The exclusively command methods, while having widely varying impacts on the market, open the door wide for interference from non-market actors and, in turn, seriously prevents macroeconomic co-ordination and regulation from working effectively.

This time, the interest-rate rise is marked by some attributes.

To begin with, the longer the period of deposits or loans is, the larger the margin of increase becomes. The interest rate for current deposits remains unchanged, for example, whilst that for five-year savings goes up by the largest margin.

This indicates that the central bank hopes to put a brake on the demand for long-term loans and lengthen the period of people's deposits in the banks.

Second, the hike is designed to make the interest rate of housing loans borrowed by individuals more market-orientated in order to lessen the financial burden on the ordinary housing buyers.

Overall, the central bank's interest-rate increase scheme is quite necessary, if a little late in coming. It is hoped that the People's Bank will closely watch over the market response to the interest-rate increase measures and, accordingly, decide the frequency of interest-rate hikes in the future.

The situation where a very long interval set in after the 2004 rate increase should be avoided. This author hopes the central bank will continuously increase the interest rate according to the reality of the market, because this is the best leverage in co-ordinating and regulating the economy on the macro basis.

Expert Forum 3

Problems in Macro Economy

China's economic growth exceeded expectation in the first half of the year. An excessive trade surplus, the oversupply of money and the rebounding of fixed asset investments have reflected problems in our macro-economic control. It is important to analyze these problems for the steady and healthy development of the economy.

Three major problems exist within the current macro-economy.

First, the risk of a suspension in the export-investment circle is increasing. China's economic development overly relies on foreign demands. Not only is there a huge trade surplus, but investment in trade industries is also increasing. Each facilitates the development of the other. If the world economy maintains its rapid growth, and the increase of domestic productivity exceeds production costs, such a cycle will be fine. But as the development of the world economy slows, China 's exports will decrease and investment will be cut. Once such a cycle is broken, China's economic growth will slide.

This year and next are likely to represent the high point of the current world economic cycle. As imbalance intensifies and countries tighten their policies, the world economy may move downward after 2007. This may increase the risks of a suspension in the export-investment cycle. The Chinese economy may be hugely affected.

Second, the domestic economic structure remains unbalanced. China's trade surplus increases largely because domestic savings and government tax revenues are also increasing. High savings rates originate from low consumption. And the root of that is in the distribution of national income. The proportion of enterprise profits and government tax revenues are too high and the proportion of residents' incomes is low. Government expenditure on public products are low so residents must compensate with individual consumption. This greatly affects residents' consumption inclination.

Therefore the key to solve this imbalance is to boost domestic demand and increase the consumption rate. A practical method is to raise government investment in social causes, public facilities and social securities, which will reduce net exports and increase the residents' consumption tendencies in the short term.

Third, the economic development strategy is distorted. Economic construction has been distorted by taking GDP growth as the central indicator of success. The strategy of giving priority to efficiency with due consideration to fairness has been distorted. The taxation system and officials' incentive mechanism have both been GDP-oriented. Some regional governments and officials try every means to control public resources for their own interests and deliberately distort the macro-control policies of the State. Those responsible for these activities should be swiftly punished to guarantee the implementation of the Central Government's macro-control measures. In the long term, the taxation system and incentive mechanism for officials should be reformed, and the economic development strategy should be reconsid

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