Op-Ed Contributors

Tightrope balancing effort

By Jing Ulrich (China Daily)
Updated: 2010-06-10 09:30

Authorities have opted to leave interest rates unchanged since late-2008, erring on the side of caution in using broad policy tools to adjust monetary conditions. Uncertainties surrounding the sovereign debt crisis in Europe may have prompted policy-makers to slow the pace of tightening, delay interest rate adjustments and suspend the introduction of more aggressive administrative controls.

Although the countries at the center of the European sovereign debt crisis - Greece, Ireland, Portugal, Spain and Italy - account for only 3.5 percent of China's exports, the risk of contagion cannot be ruled out. If the problems affecting these economies were to spill over to major European countries, China's export-related industries, including consumer product and component manufacturing could be adversely impacted by weaker external demand. As a whole, Europe accounted for 22 percent of China's exports in 2009.

Already, the sharp appreciation of the euro relative to the yuan has affected Chinese exporters that settle trade in euro. Cyclical upstream sectors leveraged to global growth may also suffer if resource prices and freight volumes decline.

Aside from hampering exporters' competitiveness, the rapid decline of the euro has complicated any potential move to allow the currency to appreciate against the dollar. Under normal circumstances, a mild appreciation of the renminbi relative to the dollar would have limited impact on exports, in light of Chinese exporters' rapid productivity gains.

Allowing the Chinese currency to appreciate against the dollar at this juncture would further drive up its value against the euro. We believe Chinese authorities are likely to tread carefully while assessing the health of external demand.

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No discussion of China's economic policy can ignore issues surrounding the property sector. The current round of tightening has clearly dampened housing transaction volumes, driving buyers to the sidelines. There have been signs of prices softening on the secondary market and several instances of price reductions by developers.

Although housing prices have corrected only modestly, we believe the government's main intent is to restrain price increases rather than engineer a sharp correction or dampen activity. Additional austerity measures emerging from the local-government level appear to have been less severe than policies introduced in Beijing and remain supportive of owner-occupied home purchases.

In light of curbs on property investment, we believe domestic investors may gravitate towards equity investments once the primary sources of economic concern are allayed. Any easing in property tightening measures or signs of EU stability should provide a boost in sentiment and shift investor focus towards valuations that are undemanding in historical context.

The author is managing director and chairman of China Equities and Commodities, JP Morgan.