As Inflation Falls,Time to Support Growth

As we frequently emphasized in our posts and told our clients, Chinese government was waging a war against inflation by tightening monetary policies which widely hurts exports of China. Now with the August inflation lowered to %4.9, China rapidly moved to support growth again:

It’s time for China to boost growth   (By Wang Yanlin, Shaghai Daily Newspaper)

IN the first eight months of the year, the government’s top priority, while framing macro economic policies, was the fight against inflation. But there has been a slight shift in emphasis.

Last Monday when Vice Premier Wang Qishan delivered a speech at the 12th China International Fair for Investment and Trade in Xiamen, Fujian Province, he said the current goal of the government was to “realize a stable and relatively fast economic growth” and “put the rising inflation under control.”

This is possibly the first time that “spurring growth” has been put higher on the agenda than “curbing inflation” by a heavy-weight government official during a formal business occasion this year.

Policy makers are usually very circumspect while commenting on policy issues in public. So is Wang’s public stance an indication that top decision makers could be considering the odds of adjusting macroeconomic policies? This may well be so.

Economists and analysts have been urging the government to shift focus from taming inflation to supporting growth.

The newly released economic data show China’s gross domestic product has slowed to 10.1 percent in the second quarter, down from 10.6 percent in the first three months and 11.9 percent last year.

The Consumer Price Index, the main gauge of inflation, grew at 4.9 percent in August - the slowest pace in 14 months. It has been on the decline for four consecutive months and the speed at which inflation eased went beyond economists’ boldest expectations.

Industry slowing

In contrast to the softening inflationary pressure, the risk of slower economic growth is intensifying.

In August, industrial production grew 12.8 percent, the slowest since February last year.

Among the sectors which dragged down output was the automobile industry, which used to be a major growth driver. The automobile sector fell 3.3 percent last month.

Exports, another key element of overall economic expansion, rose 21.1 percent in August, cooling down from a 22.9-percent jump a month earlier.

The slower growth came despite the government increasing export tax rebates for textiles and garments - the two sectors hardest hit by yuan appreciation and weaker demand from developed markets.

China’s urban fixed-asset investment increased 27.4 percent in the first eight months, keeping a stable growth momentum. But analysts said this was mainly bolstered by the demand created by the May 12 earthquake in Sichuan Province.

On the other hand, domestic consumption looks robust. Retail sales in August jumped 23.2 percent, slightly up from the July figure which saw the fastest rise since 1996.

However, the rest of the year may see a downturn with no new strong selling points, like the housing and automobile sectors of the past, to boost growth.

All figures now seem to point in one direction °?- that the government should take concrete steps to sustain economic growth. Huang Yiping, an economist with Citigroup, said the CPI which fell below 5 percent in August could help shift the balance of policy concerns toward growth.

Sops may work

“The probability of a policy reversal may rise significantly in the coming months, as global economic conditions continue to deteriorate and domestic corporate sectors increasingly feel the impact of growth slowdown,” said Huang.

“Although the People’s Bank of China has so far maintained its bias toward tight monetary policies, it has introduced a number of measures to fine-tune trade policies as well in recent months,” he added.

The analyst said that the central bank’s steps include expansion of credit quota, slowdown of currency appreciation and increases in export tax rebates.

“This shift in policy concerns should be reinforced to keep the CPI at a healthy level,” Huang noted.

But there is a major hurdle in the way of a complete turnaround as producer prices, the factory-gate inflation measure, also keep going up.

The Producer Price Index in August soared to 10.1 percent, the highest in 12 years. Rising factory-gate costs are generally passed on to the end users, but this may in turn affect consumer prices, analysts said.

Economists suggest China should continue with its fine-tuning measures for the time being. Relaxing the credit quota, slowing down yuan appreciation and selected reduction of tax burden could go a long way to boost the economy.

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