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A dose of monetary precaution called for as bubbles swell
By Sun Lijian |
February 10, 2010, Wednesday
|
Print Edition
Print Edition
THE past year ended with plenty of good news for China's economic planners to be upbeat about. Thanks to the massive government stimulus efforts, the country has registered an impressive growth rate.
The same stimulus package, however, was greeted with less than rapturous praise when it was announced in late 2008. Skeptics then found the logic behind the stimulus to be perplexing: how could China rein in superfluous investment in the aftermath of the financial meltdown by simply investing more?
One year on, it's clear that the government "transfusion" has reinvigorated the economy. A big chunk of the 4 trillion yuan (US$585.84 billion) stimulus funds, which was channeled to China's inland provinces and rural areas, has contributed to faster growth in these places than in the coastal east. Fixed investment in agriculture and services sectors also outgrew the industry sector.
The challenge for this year is therefore how to keep China's vibrant economy on track while transforming its current growth model from one reliant on "transfusion" into one that can generate blood cells to sustain itself. Of all the indicators of economic recovery, the recent rises of China's producer price index (PPI) and consumer price index (CPI) - two barometers of inflation - show that the market is again reacting to price signals.
The downward spiral of PPI was arrested in December, when the figure rose 1.7 percent from a year earlier; the CPI edged up 0.6 percent year on year in November after falling for nine consecutive months. Many companies worldwide have been cashing in on the price hikes of bulk commodities. Although modest price increases will help their bottom lines, the downside of this rebound has manifested itself in China's unrelenting real estate fever.
Against this background, regulators should keep an eye on the growth trajectory of PPI and CPI lest global speculative capital call the shots in pricing bulk commodities and take a free ride on China's rapid recovery.
Another by-product of the "transfusion" is that it creates a pro-finance bias in the allocation of capital. For privately owned businesses, investing in them is often short-term in nature and yields relatively low returns. This in turn exacerbates the funding shortages that hobble the dynamism of many private firms. Money that could have gone into the real economy instead flowed disproportionately to the financial sector.
Beneath China's glowing economic report card lie some other hidden risks. The most notable among them is the alarming pace at which the country's money supply increases. Herein lies a dilemma for China's financial regulators.
On the one hand, the country's much-heralded formulation of a new growth model hinges upon a "moderately loose" monetary policy. On the other, as the pressure of inflation and asset bubbles continue to build, a dose of monetary precaution is needed to keep them in check.
China's monetary policy needs to be flexible enough to respond to market vagaries. There has been much talk of late on the necessity for regulators to raise interest rates.
True, the country's banking system has long been in a state of negative interest rate - referring to a situation in which inflation wipes out interest gains on bank deposits. But China's recent history is littered with examples in which negative interest rate didn't necessarily spawn corrective measures.
To diffuse risks to banks as well as ensure a steady cash flow to the real economy, the People's Bank of China is now draining excess liquidity in the market. Meanwhile, it also encourages people to spend more and save less, as deposits fail to reap any de facto benefits.
If risks can be managed this way, the government certainly has no reason to raise interest rates, even before the United States does. Nonetheless, should bubbles keep swelling at the current rate, China's central bank may seriously ponder some intervention.
(The author is executive vice dean of the School of Economics at Fudan University.)
The same stimulus package, however, was greeted with less than rapturous praise when it was announced in late 2008. Skeptics then found the logic behind the stimulus to be perplexing: how could China rein in superfluous investment in the aftermath of the financial meltdown by simply investing more?
One year on, it's clear that the government "transfusion" has reinvigorated the economy. A big chunk of the 4 trillion yuan (US$585.84 billion) stimulus funds, which was channeled to China's inland provinces and rural areas, has contributed to faster growth in these places than in the coastal east. Fixed investment in agriculture and services sectors also outgrew the industry sector.
The challenge for this year is therefore how to keep China's vibrant economy on track while transforming its current growth model from one reliant on "transfusion" into one that can generate blood cells to sustain itself. Of all the indicators of economic recovery, the recent rises of China's producer price index (PPI) and consumer price index (CPI) - two barometers of inflation - show that the market is again reacting to price signals.
The downward spiral of PPI was arrested in December, when the figure rose 1.7 percent from a year earlier; the CPI edged up 0.6 percent year on year in November after falling for nine consecutive months. Many companies worldwide have been cashing in on the price hikes of bulk commodities. Although modest price increases will help their bottom lines, the downside of this rebound has manifested itself in China's unrelenting real estate fever.
Against this background, regulators should keep an eye on the growth trajectory of PPI and CPI lest global speculative capital call the shots in pricing bulk commodities and take a free ride on China's rapid recovery.
Another by-product of the "transfusion" is that it creates a pro-finance bias in the allocation of capital. For privately owned businesses, investing in them is often short-term in nature and yields relatively low returns. This in turn exacerbates the funding shortages that hobble the dynamism of many private firms. Money that could have gone into the real economy instead flowed disproportionately to the financial sector.
Beneath China's glowing economic report card lie some other hidden risks. The most notable among them is the alarming pace at which the country's money supply increases. Herein lies a dilemma for China's financial regulators.
On the one hand, the country's much-heralded formulation of a new growth model hinges upon a "moderately loose" monetary policy. On the other, as the pressure of inflation and asset bubbles continue to build, a dose of monetary precaution is needed to keep them in check.
China's monetary policy needs to be flexible enough to respond to market vagaries. There has been much talk of late on the necessity for regulators to raise interest rates.
True, the country's banking system has long been in a state of negative interest rate - referring to a situation in which inflation wipes out interest gains on bank deposits. But China's recent history is littered with examples in which negative interest rate didn't necessarily spawn corrective measures.
To diffuse risks to banks as well as ensure a steady cash flow to the real economy, the People's Bank of China is now draining excess liquidity in the market. Meanwhile, it also encourages people to spend more and save less, as deposits fail to reap any de facto benefits.
If risks can be managed this way, the government certainly has no reason to raise interest rates, even before the United States does. Nonetheless, should bubbles keep swelling at the current rate, China's central bank may seriously ponder some intervention.
(The author is executive vice dean of the School of Economics at Fudan University.)
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