As Inflation Falls,Time to Support Growth
October 19, 2008
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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Timeline of China’s fiscal and monetary policy since 1995
August 25, 2008
As China’s Currency regulations gain more importance and directly affect quotations, Here are some facts about China’s fiscal and monetary policies from the present back to 1995.
– Tight monetary policy (current)
Earlier this year, facing pressure from surging inflation, a resurgence in fixed-asset investment and excessive lending and liquidity, China decided to shift its monetary policy from “prudent” to “tight”.
Tight policy has included raising commercial banks’ reserve-requirement ratios, allowing the currency — renminbi (also called the yuan) — to appreciate and controlling bank lending.
The latest move was in June, when the central bank — People’s Bank of China (PBOC) — raised the reserve ratio by 1 percentage point in all: 0.5 point effective June 15 and another 0.5 point effective June 25. The rise on June 25 was the sixth this year and brought the ratio to a record 17.5 percent.
The tight policy appears to have had an impact. The consumer price index eased to 6.3 percent in July from a near 12-year high of 8.7 percent in February.
Economic growth slowed to 10.4 percent in the first half of 2008 from 11.9 percent for all of 2007.
– “Prudent” fiscal and monetary policies (2005-2007)
China switched to a “prudent” policy at the beginning of 2005. During 2005, the country reduced issues of long-term National Construction Bonds to 80 billion yuan (11.7 billion U.S. dollars) from 110 billion yuan the previous year and cut the fiscal deficitby 19.8 billion yuan to 300 billion yuan.
In 2007, the PBOC raised the reserve ratio 10 times, from 9 percent in January to 14.5 percent as of December. The central bank had raised the ratio only five times over six years since 2000.
– “Proactive” fiscal policy and “prudent” monetary policy (1998-2004)
The proactive fiscal policy and prudent monetary policy were adopted in 1998 to counteract the negative impact of the 1997 Asian financial crisis.
China issued 910 billion yuan worth of national bonds over these years and invested the proceeds in infrastructure. The move boosted domestic demand, which had been weakened by the financial crisis, and contributed 1.5 to 2 percentage points of national output growth each year.
– “Appropriately tight” fiscal and monetary policies (1995-1997)
To rein in high inflation that started in 1993, China imposed appropriately tight fiscal and monetary policies. There was a surge in fixed-asset investment in the latter half of 1992, which was followed by major food price rises in 1993.
After the new policies were launched, the PBOC stepped up efforts to control money supply and finally reduced the consumer price index from 21.2 percent in January to 12.3 percent in August in 1995. The annual price increase was kept under 15 percent and gradually leveled out in the following years.
Source: Source: China Daily
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Rising FDI reflects inflow of hot money
July 13, 2008
July 13 — Foreign direct investment (FDI) in China rose 45.5 percent in the first half of the year, deepening worries that the inflow of “hot money” could lead to higher inflation.
The Ministry of Commerce said on Friday that foreign investors spent 52 billion U.S. dollars in China between January and June. In the same period last year, FDI increased only 12 percent.
The ministry did not provide figures for June, but based on data published for the first five months, the June figure is estimated at 9.6 billion dollars, up from 6.6 billion dollars a year ago.
Gene Ma, macroeconomic analyst at Beijing-based economic research firm China Economic Business Monitor, said: “The inflow increase is fast, but we don’t know where the money has gone.” [Read more]
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China CPI to rise 7.2% in 2008: BOC
July 10, 2008
China’s consumer price index (CPI), the main gauge of inflation, is expected to rise 7.2 percent year on year in 2008, according to a Bank of China (BOC) report on Wednesday.
The report, released by the lender’s global financial market department, suggested the central government adopt more tightening monetary policies to further tame inflation, drain liquidity and curb excessive investment.
China had been under inflationary pressure this year as the CPI increased 7.7 percent in May from the same month last year. The figure was 8.5 percent in April, up from 8.3 percent in March and near the 12-year high of 8.7 percent in February.
The producer price index, another measure of inflation, accelerated to 8.2 percent in May after gaining 8.1 percent in April, according to the National Bureau of Statistics.
The BOC predicted in an earlier report CPI in 2008 would increase 6.8 percent year on year. However, the report said “Rising prices of gasoline, coal oil and electricity will push up the previously estimated figure.”
China’s National Development and Reform Commission had raised the price of refined oil by 1,000 yuan per tonne as of June 20.
The report advised the government to raise interest rates and rein in appreciation of the yuan, the country’s currency. China was very likely to raise interest rates in the fourth quarter, it said.
The central parity rate of the yuan, or renminbi (RMB), was set at 6.8489 yuan on Thursday against the US dollar, since the country un-pegged its currency from the greenback in July 2005.
The yuan has risen more than 6.65 percent against the US dollar so far this year, in comparison with the 6.9 percent gain last year, and has broken its own record value 52 times.
“A slower appreciation in the currency will help to make full use of the domestic labor force, which is China’s most sufficient resource,” the report explained.
It also forecast inflation might show a deceleration in June as food, vegetables and fruit prices dropped. The CPI was expected to rise 7.3 percent in June year on year.
Source: China Daily
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