The PBC ended its annual policy meeting yesterday.I am still waiting for the translation of the statement coming out of the two-day conference to appear on the website, but from what I gather, what they did not announce may be more interesting than what they did.
The PBoC said it will take more steps to cool inflation and overheating, using “tighter monetary policy” to “prevent price increases from spreading.”No big surprise here, since the annual end-of-year Economic Conference last month made it pretty clear that overheating and inflation are the government’s top concerns for 2008.The PBoC also announced the standard stuff about reforming the exchange rate system and liberalizing financial markets. The statement seems to have been, however, a little skimpy on specifics.
More importantly the PBoC did not announce growth rate targets for money creation or new loans, which, if I remember correctly, they have always announced in previous years.Cary Huang of the South China Morning Post reports that “Sources said the meeting failed to announce the projected annual growth rate for the money supply or for lending due to differences among officials.”
There have been rumors for a while now about sharp disagreements between “pro-growth” elements of the leadership versus those who are worried about imbalanced growth caused by excess monetary expansion.The former see little to no overheating in the economy, are worried about a US recession and about domestic unemployment, think inflation is a one-off food problem that will soon be reversed, and want to leave the money spigots on more or less at full blast.The latter worry about overinvestment and excess capacity creation, rising inflation, and explosive growth in money and new lending, and are looking for ways to slow down money creation. For me the most important result of December’s Economic Conference was that it seemed to represent a shift in concern away from the former to the latter, but that doesn’t mean that the conflict is resolved.
In and around March there will be the major reshuffling of top level positions, including provincial governorships, decided during the Plenum, and traditionally the imposition of new leadership is a time of explosive growth in new investment projects as the new provincial leaders try quickly to make a favorable impression. That may be part of the reason for resisting caps, especially quarterly caps, on new loan growth. I understand also that a number of banks are under pressure to provide more loans to their best clients and are worried that they may be constrained from doing so.Finally, the possibility of a US recession is also weighing heavily on the minds of some.
The argument over China’s future monetary policy is far from over, and that is going to matter a lot in 2008, even if you believe, as I do, that their attempts so far to rein in excess money are focusing on the wrong things.If inflation and investment numbers stay high in the first quarter of this year, which I expect, the pro-growth groups may lose further prestige and power, but if China is indeed suffering from monetary expansion, as I think it is, the longer we keep this game going the harder it will be to adjust.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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October, 2007
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