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Small changes the way forward
By Sun Lijian |
August 14, 2009, Friday
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Print Edition
Print Edition
CHINA'S central bank issued a report on August 5, announcing that while it would continue a moderately loose monetary policy, it would make minor adjustments when necessary.
This is a good sign showing the government is attaching due importance to the change of tactics to reduce the possible negative effects brought about by the strategy (loose micro control policies) it adopts.
Given that investment transfusion is still the major driving force for China's economic recovery, an abrupt change of the relatively loose micro control policies may nullify the government's previous efforts.
After all, the current increases in investment, industrial output as well as GDP are largely attributable to the central government's 4 trillion yuan (US$580 billion) stimulus package and stimulus plans for 10 key industries.
Yet an economy dependent on government investments has many drawbacks. True, with an active fiscal policy, a moderately loose monetary policy, plus the stimulus plans, the government has successfully reactivated the banking industry's enthusiasm to issue loans. Such optimism and enthusiasm soon spread to the sluggish stock market as well as the real estate market.
But with the economic revitalization came problems of excessive liquidity and overrated stock prices in the capital market.
With the increasing flow of capital from enterprises and the hot money from abroad into the stock market seeking high returns, the government finds it imperative to readjust its market rescue measures.
Otherwise, the excessive prosperity of the fictitious economy may take up too many resources that are indispensable to the development of the substantial economy.
It must be noted that although China's economy has shown signs of stabilization and recovery, it does not mean China has established the ideal mode for the healthy development of its economy. In a way, China is solving the problem of overproduction by encouraging overproduction.
Such economic expansion has not stimulated consumption and investment from the public. Therefore, China's economy is still characterized by deflation in which supply exceeds demand.
Idle capital
If the situation remains unchanged, it is unlikely for China to create a market environment in which enterprises get increasing returns for their investments.
What's worse, instead of taking efforts to raise their operating income, many enterprises, especially those that have received government subsidies, tend to invest their idle capital in the stock market and the real estate market to cover their poor business performance.
The public also tend to follow the herd when investing in the stock market, acting more like speculators than investors. As a result, even if there are not big changes in the fundamentals of the Chinese economy, the stock market starts to fall whenever there is any possible change in the government's monetary policies or measures regulating banks' credit capital.
In such a context, the central bank's decision to make necessary small changes while sticking to loose micro control policies may be the best alternative given that China has yet to expand its domestic demand to replace government investment as the driving force for economic growth.
This means that rather than tightening monetary policy, the central bank would give more technical guidance to the flow of capital. For example, it may "force" more credit capital into the substantial economic sectors by making use of asymmetric interest rate increases.
(The author is professor of finance and executive vice dean of the School of Economics at Fudan University.)
This is a good sign showing the government is attaching due importance to the change of tactics to reduce the possible negative effects brought about by the strategy (loose micro control policies) it adopts.
Given that investment transfusion is still the major driving force for China's economic recovery, an abrupt change of the relatively loose micro control policies may nullify the government's previous efforts.
After all, the current increases in investment, industrial output as well as GDP are largely attributable to the central government's 4 trillion yuan (US$580 billion) stimulus package and stimulus plans for 10 key industries.
Yet an economy dependent on government investments has many drawbacks. True, with an active fiscal policy, a moderately loose monetary policy, plus the stimulus plans, the government has successfully reactivated the banking industry's enthusiasm to issue loans. Such optimism and enthusiasm soon spread to the sluggish stock market as well as the real estate market.
But with the economic revitalization came problems of excessive liquidity and overrated stock prices in the capital market.
With the increasing flow of capital from enterprises and the hot money from abroad into the stock market seeking high returns, the government finds it imperative to readjust its market rescue measures.
Otherwise, the excessive prosperity of the fictitious economy may take up too many resources that are indispensable to the development of the substantial economy.
It must be noted that although China's economy has shown signs of stabilization and recovery, it does not mean China has established the ideal mode for the healthy development of its economy. In a way, China is solving the problem of overproduction by encouraging overproduction.
Such economic expansion has not stimulated consumption and investment from the public. Therefore, China's economy is still characterized by deflation in which supply exceeds demand.
Idle capital
If the situation remains unchanged, it is unlikely for China to create a market environment in which enterprises get increasing returns for their investments.
What's worse, instead of taking efforts to raise their operating income, many enterprises, especially those that have received government subsidies, tend to invest their idle capital in the stock market and the real estate market to cover their poor business performance.
The public also tend to follow the herd when investing in the stock market, acting more like speculators than investors. As a result, even if there are not big changes in the fundamentals of the Chinese economy, the stock market starts to fall whenever there is any possible change in the government's monetary policies or measures regulating banks' credit capital.
In such a context, the central bank's decision to make necessary small changes while sticking to loose micro control policies may be the best alternative given that China has yet to expand its domestic demand to replace government investment as the driving force for economic growth.
This means that rather than tightening monetary policy, the central bank would give more technical guidance to the flow of capital. For example, it may "force" more credit capital into the substantial economic sectors by making use of asymmetric interest rate increases.
(The author is professor of finance and executive vice dean of the School of Economics at Fudan University.)
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