My Blog

February 6, 2008

I am currently in Spain for a business meeting and will send the next week or so in New York, so some of my entries are going to be posted late.  In China the debate about policy continues to rage, it seems, and although those of us outside the State Council can only guess at what is happening, the back-and-forth in the press gives us some hints of what the issues are likely to be.  For example in China Daily Fu Jing wrote yesterday that economic policy needs a “rethink”. 

The country needs to rethink its economic policy with snowstorms hitting regions and an economic slowdown in the United States, economists have said.  “The economic situation has become complicated with the new factors cropping up," Wu Jinglian, one of China's top economists, told China Daily yesterday.  It is imperative that the new developments are considered with measures to combat high inflation and the overheating of the economy, said Wu, from the State Council Development Research Centre, the central government's think tank.

Although the article did mention that vigilance against inflation and overheating needed to be maintained, these seemed to be fairly perfunctory acknowledgements in an article warning that China’s economy may slow down much more sharply than expected, especially if tightening measures are enforced.

The fears of people who share Mr. Fu’s views were reinforced by the poor showing in the recently-released headline PMI for December, which dropped from 55.3 to 53.0, although this is still in “expansion” territory (anything above 50).  Nonetheless it does suggest that both internal factors (the weather and the credit tightening) and external factors (a slowdown in export growth) are weighing on the economy, especially given the sharp drop in the new export orders index from 54.4 to 49.0.  Today Goldman Sachs made a trade recommendation that investors short the renminbi against the rupee in part, it seems, because they think the weather crisis will slow the renminbi appreciation.

On the other hand the South China Morning Post had this to say:

Zhu Hongren , deputy head of the National Development and Reform Commission's economic operations department, the nation's top economic planning body, said overall economic fundamentals remained sound.  He listed several positive elements supporting economic growth, such as the Beijing Olympics in August, efforts to restore agricultural and industrial output, and some "good news" yet to be delivered.  "Let's wait and see what happens. I hope we can hear some good news."

Analysts believe he was alluding to a relaxation of economic controls by Beijing. They said policymakers were quietly loosening the monetary reins after the bad weather threatened to stunt first-quarter growth.  The analysts pointed out that President Hu Jintao did not mention the government's resolve to prevent overheating - a common topic - when he spoke about the economy last week. Instead, he told policymakers to "fully realize the complicated and changing economic environment and preserve as long as possible China's stable and relatively fast economic growth".

In an article I had missed, about two weeks ago the Economic Observer weighed in against using price controls to combat inflation, arguing that as a monetary problem, the only way to address inflation was by adjusting (read: tightening) monetary policy and the currency.  Similarly, a researcher at the very prestigious Chinese Academy of Social Sciences published an op-ed piece in the China Daily late last week warning that it was too early to claim that adverse global conditions meant it was time for China to relax its new-found monetary hawkishness:

Many say the Chinese authorities should reconsider the tight monetary policy currently in effect.  Their concern is not baseless for the economic situation in and out of China does not allow for too much optimism. Capital markets around the world are stumbling. China and the US are also seeing a narrowed difference in their interest rates.

However, these facts are far from adequate for the Chinese authorities to change the tight monetary policy.

I have seen more articles supporting than opposing continued tightening and no relaxation of monetary policy, but interpreting what this means is not easy.  As I see it, my sources are more likely to be biased to the monetary camp, who are still much more worried about the consequences of rising inflation and economic overheating, then to the pro-growth camp, who do not want to see economic and employment growth drop sharply.  Until recently the monetary camp seemed to be dominating the debate after having been relegated (much too long, in my opinion) to the margins, so the fact that the so many economists are arguing strongly and urgently in favor of a continuation of monetary tightening and renminbi appreciation suggests to me that they are worried that they are being once again pushed away from the center of the policy debate.

Neither I nor any other outsider knows what is really happening, and I am probably doing little more than reading tea leaves, but I am worried that we may be seeing another shift in policy.  If worry about a slowdown causes the authorities to back away from their recent acknowledgement about the serious monetary bind in which China has found itself, I can only imagine that things will get worse as we approach the Olympics.

Amid all this debate, the government continues to show the people that it cares about the consequences of the weather crisis.  An article in yesterday’s China Daily tells us reassuringly that “Across China, the worst winter storm in five decades has prompted governments to fight profiteering and maintain market order.”  Among other things the government has told affected mobile phone operators that they cannot discontinue service for lack of payment, and they have punished railway station managers for allocating impossibly-scarce train tickets to themselves and then scalping them at many times their stated value – a popular activity this year since, during the Spring Festival, millions of Chinese overcrowd the trains as they go home to see their families for this most-important of Chinese family holidays, and the recent weather disaster has closed down many of the trains and made this year’s homecoming impossible for hundreds of thousands of workers.

It is hard to argue with punishing railway managers who withdraw scarce train tickets and re-sell them at a profit, and of course when the main reason many customers cannot pay their phone service is because of weather-related breakdowns, they should not be penalized, but some of the other inflation-busting activities reported by the media are less helpful, even if they are crowd-pleasers.  In their goal to eliminate “profiteering”, hotels inundated with travelers have been prevented from raising room fees, restaurants and grocery shops running out of food and other supplies have been punished for raising prices, and everyone is required to get approval from the appropriate authorities before raising any of their prices.  It seems that passing on part of the cost of the crisis to small businesses (for some reason I suspect larger businesses have more recourse) is likely to make the economy less, not more, productive.

Comments (2) for "China: more on “will they or...

One argument is that China may be between the hard, instead of soft, landing and the monetary collapse. Though how sound this argument is has not yet been proven, it is well grounded that pressures are growing even without the subprime morgage crisis. Data shows the tightening monetary policies have taken effects in the past two months concerning the slightly decreasing M2. However, the snow crisis may swing the base, or simply the determination for the tightening monetary policies. On the other side, Fed's interest rate cut has long jeopardized China's central bank's effort to control money flowing into the country. Whether inflation is an effective way to mitigate the overflowing of liquidity seems to be doubted in China and due to its negative effects on the individuals, the government has paid close attention and do take measures combating the unaccept CPI. Will that bring about the fast appreciation of RMB expected, or even conspired by the US government? Likely. In countering the snow crisis, it seems to be more efficient at the current time pushing government policies into practice if the government itself pays more attention to the so called "superficial" perspectives. For the SME part, it seems not that favorable for SMEs here though we all know that SMEs are and should be a key momentum for sustaining economic growth. That partly comes from the history and culture, and partly from the government policies, considering the growth of NGOs and NPOs here. During crisis, it is easier and probably less attentative, because of the long term ignorance or even discrimitive attitudes towards SMEs, to sacrifice the interests of SMEs. This probably connects with the governments' prompt drives to paint the outside of the house first. By ian - 2/6/2008 10:14 PM

btw, another article on FT by Richard McGregor : China’s economic growth passes its peak (http://www.ft.com/cms/s/0/a136b73e-d5a1-11dc-8b56-0000779fd2ac.html) argues China's economic growth moderation concerning the export factors, which is long been considered to be the one of key momentums of China's soaring economy and foreign curreny reserves. By ian - 2/7/2008 1:39 PM