China\’s monetary policy gets a scholarly touch
The appointment of three new academic members to the central bank\’s monetary policy committee on Monday reflects the increasing inclusiveness of monetary policymaking, but may not have any apparent bearing on the timing of an interest rate hike, analysts said.
The People\’s Bank of China (PBOC) said three Chinese economists – Xia Bin, Li Daokui and Zhou Qiren – will replace Fan Gang, the only academic member of the committee, which advises on major monetary issues.
\”Adding two more academics to the monetary policy committee is a welcome change,\” said Wang Tao, head of China economic research at UBS Securities. \”I hope this helps to increase healthy debate within the committee, and increase the independence of monetary policy.\”
\”The appointment of three academic members this time – instead of one – indicates the increasing importance of academic voices in monetary policymaking and the three, with different backgrounds, are expected to complement each other to add to the inclusiveness of the panel,\” said Sun Lijian, an economist with Fudan University. It would make the country\’s monetary decision-making more rational, he said.
Going by their recent comments on inflation, with Li saying that China could precede the United States in raising the rates and Zhou urging a timely and firm exit from stimulus policies, it is speculated that their appointment may signal chances of an earlier rate hike.
Zhou said in a February speech that it was high time that China exited from the stimulus measures. \”Given the past experiences, the stimulus through expanding money supply and debt only has a short-term effect,\” he said in the speech.
One of the side effects of the stimulus is rising inflation. \”The price of the stimulus policies is mainly the adverse effect of the large-scale release of money on the overall market price situation,\” he said. \”We have seen it on the market.\”
Li said early this month once China\’s consumer price index (CPI), a major measure of inflation, rises 3 percent, the country is set to increase the rates. China\’s CPI rose by 2.7 percent year-on-year in February.
He also said on Monday that China may suffer from exported inflation from developed economies as their continued relaxed monetary policy would lead to surging raw material prices and large-scale capital flowing into the emerging economies, including China.
Meanwhile, China should keep itself alert against possible price rises due to weather changes, such as the recent severe drought in southwestern regions.
Xia Bin said on Monday that three factors should be taken into account when deciding on whether to raise the interest rates. It should be considered if real negative deposit interest rates occurred. But if inflationary expectations are not strong, the hike would be inappropriate. Moreover, China should not move ahead of the US since it would bring in speculative capital.
China\’s benchmark one-year deposit rate stands at 2.25 percent.
Dong Xian\’an, chief macroeconomic analyst of Industrial Securities, said economic fundamentals should be the paramount determinant in interest rate related policymaking and the appointment of a new monetary policymaking panel would not have any substantial bearing on the timing of the possible hike.
The month-on-month CPI figure is a crucial factor and as it continues to rise, the hike may come in the second quarter of this year, he said.
China seen as a motor of global economy: Soros
George Soros, the world famous investor and currency speculator, said on Wednesday that China has been the first country to recover from the financial crisis and emerged as a motor of the global economy, with its isolation from the global financial system aiding a swift economic recovery.
\”For China, the financial crisis was an external shock. It hasn\’t really shaken the (China\’s financial) system itself,\” said Soros in a public discussion with a panel of experts and students at Hong Kong University.
Besides, China had resources to stimulate the economy and was relatively better situated to tackle the crisis, he added.
Soros predicted that China, India, Brazil and other developing countries are going to grow faster than the developed world.
Soros is the founder of Soros Fund Management and co-founder of the Quantum Fund.
China\’s CPI to rise 3.2% in 2010
Chin\’s CPI will rise 3.2 percent in 2010, Beijing Times reported Tuesday, citing an expert with the State Information Center.
This year\’s CPI growth will be mild and will focus on the food and housing sectors. The peak is expected to appear in the June-July period, according to the expert.
China\’s economy is forecasted to grow over 11 percent in the first quarter, about 10 percent in the second quarter and below 10 percent in the last two quarters.
China should increase social spending: OECD
China should further step up social spending to push forward reforms such as health care, welfare and education to sustain its economic growth, the Organization for Economic Co-operation and Development (OECD) said in a report on Tuesday.
Although China\’s reforms have increasingly focused on the need for social cohesion in recent years, said the report, more efforts are still needed in various areas to improve people\’s living standards over a longer term.
The fragmented system of welfare assistance, pension and health care should be unified, it said, stressing reforms on health care should be continued so as to ensure that provision at local levels is improved and eventually the different insurance systems are unified, it said.
It also said China\’s registration system and restrictions on migrant workers\’ access to social services create obstacles to labor mobility, therefore should be relaxed.
OECD groups 30 nations, mostly wealthy European countries, along with Canada, the United States, Japan, Australia, New Zealand, the Republic of Korea, Mexico and Turkey.
The report, the second of its kind since 2005, said China is now leading the world economy out of recession with the help of the massive stimulus package.
\”The Chinese government\’s swift and vigorous action to support its economy has contained the impact of the global recession,\” said Pier Carlo Padoan, chief economist and deputy secretary general of the OECD.
China may overtake the United States to become the leading producer of manufactured goods in the next five to seven years, the report said.
However, Zhang Zhigang, chief economist of the Center for International Economic Exchanges, said that to well study China one should not be confined to consider the country\’s aggregated economic volume but take into account the per capital economic volume, as China is a very populous nation of 1.3 billion people.
\”It is true that China is capable of putting man in space, but on the other hand, in much of its underdeveloped inland areas, oxen are still used to plough the farm\”, said Zhang at a ceremony to launch the survey.
While stressing the rapid expansion of the Chinese economy, the report also touched upon some of the weak points China faces, including the country\’s over-reliance on foreign-sourced technology embodied in foreign direct investment.
The contribution added-value made to research and development was only one-tenth of that in the United States in 2005, according to the 232-page survey.
As for financial and monetary issues, it said China will \”eventually require a flexible exchange rate regime with open capital markets\”.
Greater flexibility of the yuan exchange rate could not be achieved in a short period of time and it requires a step-by-step approach with supporting reforms in the financial areas, said Padoan in an interview with Xinhua.
China\’s business environment optimistic
The majority of foreign-invested enterprises in China are still optimistic about the country\’s business environment, a U.S. business group leader said in Beijing Tuesday.
Harley Seyedin, president of the American Chamber of Commerce in South China, told Xinhua in an exclusive interview that most of the foreign enterprises represented by the chamber considered the business environment in the country favorable, and were planning to invest 44 percent more in 2010 than they did last year in southern China.
\”China\’s economic recovery is well on its way,\” Seyedin said. \”The investment prospect here is very optimistic.\”
He was speaking just weeks after the American Chamber of Commerce in South China released its 2010 Special Report on the State of Business in South China earlier this month.
The American Chamber of Commerce in South China represents more than 1,650 enterprise and individual members, and has conducted its special report study annually since 2006.
According to the special report, more than 90 percent of enterprises that took part in a study by the chamber considered China\’s business environment to be good, very good or outstanding.
It also said 90 percent of the respondents believed China\’s business environment had improved compared with 12 months ago.
\”These optimistic figures show that foreign-invested enterprises participated in our study are very confident of China\’s business environment,\” Seyedin said.
The chamber estimated that its members would invest a minimum of 9.4 billion U.S. dollars this year.
\”The enterprises are increasing their investment budget in China because it has a favorable investment environment, and because they can profit in China,\” Seyedin said.
According to the special report, close to 79 percent of respondents said their companies had already reported profits, whereas another 15.7 percent expected profitability within two years.
Wang Yukui, head of the communications department of Boeing China, on Tuesday told Xinhua the investment environment for foreign businesses on the Chinese mainland had seen continuous improvement since Boeing entered the market 38 years ago.
\”We have good cooperation with the Chinese aviation industry,\” he said.
Zhu Jiming, president of the China branch of Caterpillar, the world\’s largest manufacturer of construction and mining equipment, said in an email statement that China\’s investment environment for foreign businesses had seen remarkable progress since China joined the WTO in 2001.
\”Since China\’s entry into the WTO, a lot of laws and regulations had been revised, enabling foreign enterprises to set foot in fields they had been not allowed to in the past,\” Zhu said.
He said Caterpillar\’s business in China only included sales and production when it first entered the country in 1996.
\”But now, our business scope has expanded to research and development, production, sales, service, financing, and logistics, … thanks to China\’s open and supportive policies in those fields,\” Zhu said.
Commenting on China-U.S. trade frictions, Seyedin said trade disputes between the U.S. and Canada by far outnumbered those between the U.S. and China.
\”For reasons I don\’t know, China-U.S. trade disputes have been constantly exaggerated by the press, leading people to dismiss U.S. disputes with other countries, or even with the Europe,\” he said.
He suggested the Chinese and U.S. governments conduct friendly negotiations and dialogue, to resort to the WTO and avoid unilateral actions when facing trade disputes between the two countries.
David Hon, CEO of one of the world\’s biggest manufacturers of folding bicycles and accessories, Dahon, also urged the Chinese and U.S. governments to resist protectionism, in order to provide a favorable investment environment.
Both domestic and foreign funded enterprises in China were hoping for an environment of fair competition, Hon said.
He said China\’s laws and regulations on labor, taxation, and work safety among others were reasonable, and that the U.S. enterprises should abide by the laws like their Chinese counterparts.
China becomes world\’s largest exporter
The World Trade Organization (WTO) has confirmed that China has edged out Germany to be the world\’s biggest exporter in 2009, accounting for 10 percent of the global export, the Ministry of Finance (MOF) of China announced in its website on Monday.
The MOF website also cited WTO figures that China ranked the second place last year in the world¡¯s import by taking up eight percent, only five percent lower than the United States.
China-U.S. trade win-win game
A sound and stable China-U.S. economic and trade relationship is more important than ever and the trade between the two countries is a win-win game, said Chinese Vice Commerce Minister Zhong Shan in an article published on Friday\’s Wall Street Journal.
\”China-U.S. trade and economic cooperation has generated huge and real benefits for the United States, while China has been gaining a lot from it as well,\” Zhong stated in the article.
In 2009 China jumped to become the third biggest market for U.S. exports. American companies have cumulatively invested over 62.2 billion dollars in 58,000 projects in China and reaped bumper harvests. Their profits in China amounted to nearly 8 billion dollars in 2008 alone, according to the data released by the Chinese government.
Zhong said that since the outbreak of the international financial crisis, China has been supporting the efforts of the American people to tackle the crisis.
\”On the one hand, China has increased imports from the U.S.,\” said the Chinese official.
While overall U.S. exports dropped 17.9 percent in 2009, exports to China hardly decreased. Many U.S. manufacturing firms have found comfort in the Chinese market as a shelter against the global financial storm.
\”On the other hand, good value-for-money, labor-intensive goods imported from China have helped keep the cost of living down for Americans even when they become increasingly cash-strapped,\” said Zhong. \”Without consumer goods from China, the U.S. price index would go up an extra two percentage points every year.\”
He insisted that the renminbi exchange rate is not the key to addressing China-U.S. trade imbalance.
According to the Chinese government, from 2005 to 2008, the renminbi appreciated by 21 percent against the U.S. dollar but China\’s trade surplus with the U.S. increased by 20.8 percent annually.
Since 2009 the renminbi exchange rate has remained basically stable, but China\’s surplus with the U.S. has fallen by 16.1 percent.
Zhong added that in 2009 the dollar depreciated against the euro, the Japanese yen and the South Korea won, which did not bring about fundamental changes in the trade between the U.S. and these countries.
\”As a matter of fact, only a basically stable renminbi and dollar are conducive to the overall interest of the international community,\” he said.
Meanwhile, Zhong said China always upholds and seeks balanced trade, urging the U.S. side to vigorously expand exports to China.
\”Only balanced China-U.S. trade could bring about sustained development, mutual benefits, and a win-win relationship,\” Zhong said. \”The achievement of this goal rests not with restricting China\’s exports to the U.S. but with increasing U.S. exports to China.\”
\”We hope that the U.S., while implementing its strategy to boost exports, can scrap the Cold War mentality, relax its export control against China, and expand the export of competitive products to China,\” said the Chinese trade official.
Zhong said he agreed with Chinese Premier Wen Jiabao\’s recent comments on China-U.S. relations. Wen said that it is always better to have a dialogue than a confrontation, cooperation than containment, and a partnership than a rivalry.
\”As long as we approach the China-U.S. commercial relationship in a responsible manner we will definitely be able to make it more stable and sound,\” said Zhong in the article.
China economy expected to grow 12% in Q1
China\’s annual economic growth will reach 12 percent this quarter, a government researcher said in remarks published on Monday, as economists ratchet up growth forecasts following strong industrial output growth last month.
Yu Bin, head of macroeconomic research at the State Council Development Research Center, said the Chinese economy would face relatively heavy downward pressure on the pace of growth in the second quarter and thereafter, the official Shanghai Securities News said.
It also quoted Fan Jianping, a senior economist with the State Information Center, a think-tank under China\’s economic planning agency, as forecasting the same rate of growth in the first quarter followed by a possible drop to 10.8 percent in the second quarter and 9 percent or less in the third and fourth quarters.
China\’s GDP growth picked up steadily last year to 10.7 percent in the fourth quarter from 6.2 percent in the first, as aggressive government stimulus bolstered economic growth after a heavy blow from the global financial crisis.
The latest industrial output data showed robust 20.7 percent year-on-year growth for January and February, although China\’s industry minister Li Yizhong said that the pace of growth, fed by a stimulus package in late 2008 that had nearly run its course, could not be maintained.
Macao\’s GDP up 1.3% last year
Secretary for Economy and Finance Francis Tam Pak Yuen has announced that Macao\’s gross domestic product (GDP) grew 1.3 percent last year from the previous year, the local Macao Post Daily reported on Friday.
Tam, who revealed the figure Thursday in a speech addressing an annual Spring Festival meeting of the Macao Chamber of Commerce, described last year as an \”extremely unusual year replete with challenges.\”
The 1.3 percent real growth rate is the lowest full-year rate since the establishment of Macao Special Administrative Region (SAR) in 1999, Macao Post Daily reported. The previous lowest GDP growth rate was recorded in 2001, at 2.9 percent, while the highest rate was in 2004, at 27.3 percent.
Tam pointed out that although the global economy has entered a post-crisis phase, risks in the financial sector still existed, which could cause difficulties for trade relations.
However, there are recovery opportunities for Macao\’s economy this year, said Tam, adding that he expected stable economic growth for Macao this year as long as no major unfavorable incidents occurred.
Economy needs to break from its past
The financial crisis is teaching us that the nation\’s long-held growth patterns could make its financial system very vulnerable.
Economic growth that mainly depends on investments and exports could cause insufficient domestic demand, exorbitant savings and investments rates. This in turn will trigger a surplus liquidity, asset bubbles and even inflation.
So what tactics should the government adopt to overcome an economic crisis? Generally, fiscal and monetary policies in place now are adequate remedies. To expand demand through relief and take government credit as a substitute for vanished market credit is indeed a short-term solution, but it\’s not sustainable. It actually might lead to an outbreak of a second crisis because the market has been braced by large amounts of currency issued by the authorities and more virtual wealth has accumulated in the financial system.
Capital and natural resources (land) have been the main production elements fueling our economic growth in the past. Well, now it should turn to employment and human capital. Under the current system, the total social income are mainly allocated to owners of capital and land, namely governments at various levels – which are the de facto holders of land and the major holders of capital – as well as the rich, who invest heavily to make a profit. But domestic consumption could be boosted mainly by laborers and professionals, which means the government should increase the demand for professionals.
Most of the previous Five-Year plans have emphasized the importance of transforming how this economy grows. But there are too many institutional barriers posing a fundamental problem, and improvements are urgently needed in innovation and for future entrepreneurs.
Institutional barriers exist for four reasons: First, the government still enjoys a dominant status in allocating resources rather than allowing the market to do this; second, local GDP growth is still the main standard in assessing officials\’ performance; third, the current fiscal system is somewhat opaque, including sources of revenue and expenditures.
Finally, there needs to be more market-oriented reform because the prices of upstream products and raw materials are not decided by the market and are subjected to administrative interference, which leads to a huge waste of resources and a surge in frivolous projects.
To transform the economy, the government should first reform processing and manufacturing, which accounts for a high proportion of our economy. Compared with our neighboring countries, China\’s advantage in cheap labor forces is declining, forcing the nation to intensify efforts to promote research and development, brand marketing, supply chain management, financial services and after-sale services.
Second, we should cultivate newly emerging industries and try to gain a foothold in establishing international technical standards, such as the fusion of PSTN (public switched telephone network), computer networks and cable TV networks, mobile standards, electric vehicles, efficient use of coal, and new energy development.
To remove institutional barriers, we need to continue reform in the economic, social and political systems to create an environment in which different businesses can be treated equally, and create a legally sound environment for innovation and entrepreneurship.
Monopolies could lead to the spread of corruption, and market reform should not be blamed for the results, as some critics have argued. The call for using more administrative intervention to prevent monopolies doesn\’t make any sense; it will only bring more opportunities for more monopoly privileges. So, there is absolutely no way out for countermarching market-oriented reform.
In addition, we used to rely on government-led planning and government\’s allocation of human capital, material and financial resources, but this is not conducive to technological innovation and industrial transformation. The government needs to formulate preferential policies on technology innovation and new products and form a combined force with the law of market economy.
The government should set boundaries for itself and administrative license. Market access permission against the law should not be approved.
The author is a researcher at the Development Research Center of the State Council. The story first appeared in the National Business Daily.
