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China improving macroeconomic control capabilities

(Xinhua)
Updated: 2008-10-26 15:46

Premier Wen Jiabao predicted early in 2008 the year would be the most difficult one for the Chinese economy. Now, the year is approaching its end, but with seemingly more challenges and difficulties yet to be overcome in the world's fourth largest economy.

The current financial tsunami originating on Wall Street has swept the world at large and bitten into the Chinese economy, albeit the foundation of the economy hasn't changed.

According to the latest data, China's GDP growth slowed to 9.9 percent in the first three quarters, declining 2.3 percentage points from the same period of last year and falling to a single digit for the first time over the past five years. Foreign trade, a major driving force of the national economy, had its contribution to the GDP reduced 8.9 percentage points year-on-year to 12.5 percent.

Given the escalated financial crisis, Wen has since the end of September stressed on different occasions that China would adopt flexible and prudent macro-control policies to combat the ensuing unprecedented challenges, striving for the stability of the country's financial sector, capital markets and economy at large.

On Wednesday, Vice Premier Wang Qishan reiterated the pledge at the 5th China-ASEAN (Association of Southeast Asian Nations) business and investment summit in Nanning, capital of the southwest Guangxi Zhuang Autonomous Region. He noted China had "confidence, conditions and capabilities to overcome any difficulty or challenge."

According to economists, the principle of flexibility for the macro control refers to that under increasing uncertainties and instability, actions should be taken timely and appropriately against the changing situation. The principle of prudence indicated policy shifts and adjustments should be made gradually, not in an unduly fast and in a reckless fashion.

They believed the "confidence, conditions and capabilities" were deeply rooted not only in the massive economy China had built up during the past three decades and huge fiscal revenues it accumulated over the recent five years, but also in the government's improving abilities to exercise macro-economic control.

China had undergone several major economic ups and downs since starting its reform 30 years ago. Each was triggered by overheating, partly resulting from decentralization, or pricing policy shifts or foreign exchange system reform.

Among the ensuing macro controls, the one in the 1984-1986 period was given up halfway; the one in the 1989-1990 period caused a hard landing. The macro-control drive in the 1993-1996 period ended with relatively serious deflation, because no timely turnaround was achieved for the then tight monetary policy.

China has accumulated rich experience and drawn enough lessons during the process of overcoming a hard landing. It has shifted from the previous reckless regulation approaches to fine tuning, step-by-step actions and flexible and comprehensive use of multiple methods.

Macro-control measures now include such economic instruments as price adjustment, taxation and credit extension, and legal and administrative means, instead of the mandates and central planning in the past.

The current round of macro control was initiated against high risks of economic overheating in the past few years. However, it was challenged this year by coincidence of an increasing number of uncertainties abroad and some problems and contradictions at home. As a result, the national economy slowed along with the economic downturn worldwide.

GDP growth ebbed to 10.1 percent in the second quarter from the first quarter's 10.6 percent level, and went further down to 9 percent in the third quarter. Accordingly, the government changed the macro-control policy of preventing the economy from overheating and curbing inflation, which was adopted at the end of last year, to a principle of maintaining growth and taming inflation.

In September, the consumer price index (CPI), a major gauge of inflation, dropped to 4.6 percent against a 12-year high of 8.7 percent in February.

At the end of the month, broad money supply (corporate and individual deposits plus cash in circulation) increased 15.29 percent from the same period of last year. The rate was the lowest in the past three years. Growth in the narrow money (current deposits plus cash in circulation) supply slowed to 9.43 percent.

All these were partly results of the macro-control efforts in the past nine months or so, and at the same time, were signs for a new policy shift.

Observers believe the fact the government underscores the flexibility and prudence of economic regulation symbolizes its macro-control capabilities are improving gradually.

Macro-control efforts in recent weeks were flexible and timely. The central bank lowered interest rates twice within one month. First it cut the reserve-requirement ratio for smaller lenders to bail out struggling smaller businesses. Then it slashed the ratio for all commercial banks.

Consumption boosts included an exemption of tax on earnings from individual deposits interest and a decision to double farmers' income by 2020. Exporters, particularly those dealing with textiles, garments and toys as well as some high-tech and high-added-value commodities, would be financially supported with higher tax rebates. The real estate market has been stimulated by tax cuts for house trading. All these tax breaks pointed to further fiscal measures.

According to Zhang Liqun of the macro-economic department of the Development Research Center of the State Council, the country's Cabinet, the principle of prudence was based on the fact China still boasted huge development potential and excessive liquidity, prone to overheating in investment. This basic situation remained unchanged. It was imperative for the country to avoid an extreme slowdown, and at the same time, prevent unduly loose policies. Otherwise, the effect of the macro-control efforts over the past five years might all come to naught, Zhang warned.

The complex and grim environment abroad and at home is a challenge faced by China, but can also translate into an opportunity for the country to upgrade its development pattern. Now the Chinese economy has entered an important period of adjustment.

The country has learned from experience over the past three decades that every major economic adjustment was followed by industrial restructuring, technological innovation and institutional reform, which drove the nation into a new era of economic growth.