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Stability will be watchword for China
By Wang Yanlin |
December 24, 2010, Friday
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Print Edition
Print Edition
CHINA is aiming to steer a middle road next year by moderating economic growth and keeping inflation in check under the 12th Five-Year Plan for the 2011-15 period.
Zhang Ping, head of the National Development and Reform Commission, China's top economic planning agency, said this month that the target for growth in gross domestic product next year will be 8 percent, and the ceiling on inflation is set at 4 percent.
Compared with 2010 targets, the newly released guidelines aim to keep economic growth unchanged and widen the inflation range by one percentage point.
Relaxing the tolerance range for inflation is consistent with media reports saying that China will cap new loans at about 7.5 trillion yuan (US$1.1 trillion) next year, a more generous ceiling than many in the market had expected.
The government will continue to make adjustments to the nation's economic structure and improve income distribution, Zhang said on December 14.
As in past years, the 8 percent growth target is likely to be a moot point. Most economists forecast the world's second-largest economy will expand faster than that.
Barclays Capital estimated China's economy may grow 9.3 percent in 2011, while Morgan Stanley forecast 9 percent. Meanwhile, Nomura suggested a rate between 9 percent and 10 percent.
The Chinese Academy of Social Sciences, a government think-tank, said in its annual analysis report that China's economy may grow as much as 10 percent in 2011, a projection more in line with the estimates of foreign institutions.
Still, all point to relatively stability after a growth rate this year of about 10.2 percent.
In the first three quarters, GDP advanced 10.6 percent year on year to 26.8 trillion yuan.
The central economic work conference, an annual meeting that concluded on December 12 and sets the tone for next year's broad economic policy, sent the same message. It announced that the government's policy stance will shift to a "prudent monetary one" and will continue relatively accommodative fiscal policy next year.
"Policy makers' key objectives and areas of focus are in line with our expectations," said Chang Jian, an economist at Barclays Capital.
"Maintaining price stability is a top priority, especially in the first half of next year, given the elevated inflationary pressures," he said. "But ensuring relatively rapid but stable growth will remain important for the government as it deliberates policy."
Wang Qing, an economist at Morgan Stanley, said China is showing a tolerance for slower growth and slightly higher inflation in 2011, but the country is also determined to set a high priority on tackling inflation.
"While the press statement uses vague language in rather general terms, it sends a signal of the importance of inflation," Wang said.
To decipher potential policy shifts, Wang pointed out subtle differences between this year's statement and the one issued last year.
Last year, there was no specific position spelled out for inflation, which reflects on the high priority assigned to the issue now.
"The potential policy environment over the next three to six months will likely be quite challenging and thus calls for market participants to exercise great caution," Wang said.
Morgan Stanley predicted consumer prices, the main gauge of inflation, will grow 4.5 percent in 2011, accelerating from this year's estimated 3.2 percent pace.
Consumer prices may rise in the first half of next year, peaking at 5.5 percent by mid-year, and then start to abate, ending 2011 at closer to 4 percent, Morgan Stanley said in a report.
Such an outlook does not quite fit neatly into the ideal growth curve anticipated by policy makers.
Chinese authorities have made intensive efforts to tame inflation in the past six weeks, from releasing stockpiles of pork, demanding harsher punishment for speculators in agricultural products and streamlining distribution networks to reduce the middle-man costs.
On December 10, the central bank announced another increase of the reserve requirement ratio - the amount of money commercial banks must hold in reserves - in a bid to mop up market liquidity and assuage inflationary pressure.
But those policies alone won't unwind inflationary expectations, and potential policy missteps are a primary risk to the rosy economic outlook for China, Morgan Stanley's Wang said.
"If Chinese authorities were to mainly rely on administrative controls over monetary aggregates, instead of using price-based policy instruments such as rate increases and appreciation of the yuan to control inflation, the risk of a policy-induced boom-and-bust economic cycle for China would be on the rise," Wang said.
Fast-changing economic conditions in the world also add to the difficulties for China. While the debt crisis spreads in Europe and the United States still keeps a fragile recovery afloat, China faces the risk that its efforts to revive exports may slip back to slower or even negative growth, analysts said.
On the flip side of that coin, tepid recoveries in other major economies may make it easier for China to manage its inflation.
Unforeseen events always lurk. If the recent tension on the Korean Peninsula spirals out of control, for example, growth prospects in China and neighboring countries in Asia could be thrown off kilter.
Zhang Ping, head of the National Development and Reform Commission, China's top economic planning agency, said this month that the target for growth in gross domestic product next year will be 8 percent, and the ceiling on inflation is set at 4 percent.
Compared with 2010 targets, the newly released guidelines aim to keep economic growth unchanged and widen the inflation range by one percentage point.
Relaxing the tolerance range for inflation is consistent with media reports saying that China will cap new loans at about 7.5 trillion yuan (US$1.1 trillion) next year, a more generous ceiling than many in the market had expected.
The government will continue to make adjustments to the nation's economic structure and improve income distribution, Zhang said on December 14.
As in past years, the 8 percent growth target is likely to be a moot point. Most economists forecast the world's second-largest economy will expand faster than that.
Barclays Capital estimated China's economy may grow 9.3 percent in 2011, while Morgan Stanley forecast 9 percent. Meanwhile, Nomura suggested a rate between 9 percent and 10 percent.
The Chinese Academy of Social Sciences, a government think-tank, said in its annual analysis report that China's economy may grow as much as 10 percent in 2011, a projection more in line with the estimates of foreign institutions.
Still, all point to relatively stability after a growth rate this year of about 10.2 percent.
In the first three quarters, GDP advanced 10.6 percent year on year to 26.8 trillion yuan.
The central economic work conference, an annual meeting that concluded on December 12 and sets the tone for next year's broad economic policy, sent the same message. It announced that the government's policy stance will shift to a "prudent monetary one" and will continue relatively accommodative fiscal policy next year.
"Policy makers' key objectives and areas of focus are in line with our expectations," said Chang Jian, an economist at Barclays Capital.
"Maintaining price stability is a top priority, especially in the first half of next year, given the elevated inflationary pressures," he said. "But ensuring relatively rapid but stable growth will remain important for the government as it deliberates policy."
Wang Qing, an economist at Morgan Stanley, said China is showing a tolerance for slower growth and slightly higher inflation in 2011, but the country is also determined to set a high priority on tackling inflation.
"While the press statement uses vague language in rather general terms, it sends a signal of the importance of inflation," Wang said.
To decipher potential policy shifts, Wang pointed out subtle differences between this year's statement and the one issued last year.
Last year, there was no specific position spelled out for inflation, which reflects on the high priority assigned to the issue now.
"The potential policy environment over the next three to six months will likely be quite challenging and thus calls for market participants to exercise great caution," Wang said.
Morgan Stanley predicted consumer prices, the main gauge of inflation, will grow 4.5 percent in 2011, accelerating from this year's estimated 3.2 percent pace.
Consumer prices may rise in the first half of next year, peaking at 5.5 percent by mid-year, and then start to abate, ending 2011 at closer to 4 percent, Morgan Stanley said in a report.
Such an outlook does not quite fit neatly into the ideal growth curve anticipated by policy makers.
Chinese authorities have made intensive efforts to tame inflation in the past six weeks, from releasing stockpiles of pork, demanding harsher punishment for speculators in agricultural products and streamlining distribution networks to reduce the middle-man costs.
On December 10, the central bank announced another increase of the reserve requirement ratio - the amount of money commercial banks must hold in reserves - in a bid to mop up market liquidity and assuage inflationary pressure.
But those policies alone won't unwind inflationary expectations, and potential policy missteps are a primary risk to the rosy economic outlook for China, Morgan Stanley's Wang said.
"If Chinese authorities were to mainly rely on administrative controls over monetary aggregates, instead of using price-based policy instruments such as rate increases and appreciation of the yuan to control inflation, the risk of a policy-induced boom-and-bust economic cycle for China would be on the rise," Wang said.
Fast-changing economic conditions in the world also add to the difficulties for China. While the debt crisis spreads in Europe and the United States still keeps a fragile recovery afloat, China faces the risk that its efforts to revive exports may slip back to slower or even negative growth, analysts said.
On the flip side of that coin, tepid recoveries in other major economies may make it easier for China to manage its inflation.
Unforeseen events always lurk. If the recent tension on the Korean Peninsula spirals out of control, for example, growth prospects in China and neighboring countries in Asia could be thrown off kilter.
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