China walks fine line to keep growth with low inflation
Updated: 2008-01-25 20:14
SOAKING UP LIQUIDITY
China's central bank, the People's Bank of China, used six interest rate hikes and 10 reserve requirement ratio increases last year to tighten monetary supply. As of January 25, the reserve requirement ratio rose another 50 points to 15 percent, the highest level in 24 years. Also, the Ministry of Finance stepped up its treasury bond issues last year to an aggregate 2.35 trillion yuan (US$325 billion), an increase of 1.46 trillion yuan from 2006.
However, analysts have warned that in some respects, China is going against the grain: although other countries may also be cutting taxes, they are also trying to stimulate their economies with looser monetary policies to cushion the impact of what is increasingly expected to be recession in the United States.
Experts have said that China must walk a fine line in trying to curb inflation without throttling back growth. In particular, they've warned against excessive reliance of monetary controls. Smaller companies in China have already started to feel the pinch of monetary tightening, with many finding it difficult to secure bank loans, economist Wang Zhihao with the Standard Chartered Bank noted.
"If the authorities are to carry out tightening measures throughout 2008, the Chinese economy might possibly suffer a serious double-whammy impact, with the domestic demand- and export-oriented sectors equally affected," said Wang Qing, Morgan Stanley's Chief Economist for Greater China.
Another factor is the government's determination to restructure the economy with a move toward better quality and higher value-added activity. The policies intended to implement this goal range widely, from energy conservation to the protection of employees' rights, but they all have a common effect: lifting the country's production costs.
Officials have acknowledged that China is unlikely to be the cheapest country any longer.
Calling this rebalancing a "substantial one-off adjustment that may result in benign inflation," UBS's Zhang warned that the government must weigh the possible adverse impact of price intervention and not be too hasty with a sweeping economic transformation.
Chinese monetary authorities also find that they may have something in common with the US Federal Reserve: that is, hindsight is clearer than foresight. Some commentators think that the central bank here, like the Fed, should have taken different actions, years ago.
For example, Song Guoqing, a professor with Beijing University's China Center for Economic Research, said that China should have acted years ago to adopt a tight monetary policy.
The People's Bank of China decided in December to shift its monetary policy from "prudent", an approach it has followed for the past 10 years, to "tight." But like the Fed, did it perhaps wait too long?
Customs figures showed that China's trade surplus, a key source of liquidity, suddenly tripled to a record US$102 billion in 2005. The surplus had more than doubled again by the end of 2007, to US$262.2 billion.
During this period, foreign exchange reserves almost doubled from US$818.872 billion in 2005 to US$1.528 trillion last year.
Despite the uncertainties, however, the majority of economists and analysts agree with Chinese officials that the outlook for the economy is largely sound and positive.
Morgan Stanley's Wang, for instance, has predicted a soft landing, with China's GDP growing 10 percent this year -- a figure many countries can only envy -- and CPI rising to 4 percent this year.
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