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Prudent manner helps sustain growth
By Chris Leung |
March 22, 2012, Thursday
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Print Edition
Print Edition
EDITOR'S Note: China's Premier Wen Jiabao this month cut China's economic growth outlook this year from a long-held 8 percent to 7.5 percent. The announcement has economists buzzing. Here's what some of them had to say.
China's official target projection of real GDP growth at 7.5 percent for 2012 has driven equity markets down because it is below the psychological 8 percent threshold that is generally thought to be the minimum growth rate required to generate enough jobs for the economy. The inflation rate as measured by the CPI, however, remains unchanged from last year's target of 4 percent.
The conservative projection thus reflects the following: (1) negative outlook on external trade, (2) heightened reliance on domestic demand to drive growth, and (3) the cautious stance on monetary loosening to remain.
Generally speaking, a lower GDP projection should be accompanied by a lower inflation forecast.
But this is not the case now. Although the headline CPI has been declining in the past few months, the underlying structural forces suggests upside risks are well alive. The food sub-index of the CPI surged on average by almost 12 percent in 2011, up notably from 7.8 percent in 2010. It is food and housing prices that anchor inflation expectation in China. Ordinary households do not follow the CPI figure to gauge their living standards.
If authorities are confident of a clear inflation downtrend, minimum wages will not keep increasing at a rate ranging from 13 percent to 22 percent nationwide. The goal of raising wages is partially (also indirectly) aimed at boosting private consumption, but the more immediate effect is to compensate the erosion of real income by food inflation.
Policymakers know well what is at stake and are apprehensive of the economic consequences. China's hands are actually pretty tied now. But the cautious stance remaining on monetary policy is the right thing to do for the long-term well-being of the economy, even at the expense of some growth in the short term.
China has managed to resist the temptation of over-loosening monetary policy, despite the clear and present danger of export deceleration. Not even one single interest rate cut has been seen so far, compared with neighboring countries that have already implemented preemptive rate cuts to arrest growth deceleration. Only China's reserve requirement ratio was cut by 50 basis points in the fourth quarter of 2011 and in the first quarter of 2012.
While we pencil in 50 basis-point cuts in each of in the second and third quarters this year, the pace of reserve-ratio reductions will be measured compared with previous cycles.
China's official target projection of real GDP growth at 7.5 percent for 2012 has driven equity markets down because it is below the psychological 8 percent threshold that is generally thought to be the minimum growth rate required to generate enough jobs for the economy. The inflation rate as measured by the CPI, however, remains unchanged from last year's target of 4 percent.
The conservative projection thus reflects the following: (1) negative outlook on external trade, (2) heightened reliance on domestic demand to drive growth, and (3) the cautious stance on monetary loosening to remain.
Generally speaking, a lower GDP projection should be accompanied by a lower inflation forecast.
But this is not the case now. Although the headline CPI has been declining in the past few months, the underlying structural forces suggests upside risks are well alive. The food sub-index of the CPI surged on average by almost 12 percent in 2011, up notably from 7.8 percent in 2010. It is food and housing prices that anchor inflation expectation in China. Ordinary households do not follow the CPI figure to gauge their living standards.
If authorities are confident of a clear inflation downtrend, minimum wages will not keep increasing at a rate ranging from 13 percent to 22 percent nationwide. The goal of raising wages is partially (also indirectly) aimed at boosting private consumption, but the more immediate effect is to compensate the erosion of real income by food inflation.
Policymakers know well what is at stake and are apprehensive of the economic consequences. China's hands are actually pretty tied now. But the cautious stance remaining on monetary policy is the right thing to do for the long-term well-being of the economy, even at the expense of some growth in the short term.
China has managed to resist the temptation of over-loosening monetary policy, despite the clear and present danger of export deceleration. Not even one single interest rate cut has been seen so far, compared with neighboring countries that have already implemented preemptive rate cuts to arrest growth deceleration. Only China's reserve requirement ratio was cut by 50 basis points in the fourth quarter of 2011 and in the first quarter of 2012.
While we pencil in 50 basis-point cuts in each of in the second and third quarters this year, the pace of reserve-ratio reductions will be measured compared with previous cycles.
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