SHANGHAI - China, the world's
fastest-developing economy, and the United States,
the world's largest economy, are now going in
opposite directions in regard to their monetary
policy. Interest rates are expected to continue
going down in the US but up in China, in at least
the coming 12 months.
This trend will
worsen the structural problems facing the Chinese
economy, making it more difficult for Beijing to
rein in the country's overheating economy and
inflation with its so-called
macroeconomic control
policies.
In an unprecedented move, the
People's Bank of China (PBoC) - the country's
central bank - raised the benchmark interest rates
twice in 25 days, with the one-year deposit rate
and loan interest rate going up 0.27 percentage
point respectively each time. It is almost a
knee-jerk response to the looming inflation for
August: the year-on-year 6.5% increase in the
Consumer Price Index is the highest in a decade.
What will complicate the Chinese
government's headache on its breathtaking growth
is that the Federal Reserve of the United States
cut the Federal Funds rate by half a percentage
point from 5.25% to 4.75%, a move that surprised
the market. A deep concern for a spreading credit
crunch due to the subprime-mortgage crisis caused
the aggressive turnaround of the monetary policy
by Fed chairman Ben Bernanke. It is widely
expected the Fed will cut the rates again next
month.
Under the accumulating pressure of
inflation, the PBoC is widely expected to be on
the track of faster rate hikes. The rates are
likely to be raised several times in the coming
months. Currently, the one-year deposit rate is
3.87% and one-year loan rate 7.29%.
A
slowdown or even a recession in the US economy
would help China cool down its white-hot growth.
Declining housing prices, together with
interest-rate hikes, in the US and other Western
countries have triggered the subprime-mortgage
crisis that entails a credit crunch and increases
the possibility of recession.
Theoretically, a recession in one of the
largest markets for China's exports would be a
healthy development for its economy: slowing down
growth in exports and trade surplus, and slowing
down growth of the country's foreign-exchange
reserves to enable a slowdown in money supply and
reduce excessive liquidity - the "original sin" of
all of the current economic problems facing China.
Now the US economy seems to be refueled by the
aggressive rate cut. If the cut will prolong (or
even boost) US economic expansion, it will
continue to fuel China's gigantic exporting
engine. And the trend of hiking China's interest
rates as well as the lowering of US interest rates
will strengthen the expectation of accelerated
yuan appreciation, which could lead to more money
pouring into China's market chasing after
investment-worthy assets.
If the
half-percentage-point cut in the US is a strong
signal of a turn toward more rate-cutting, the
PBoC's rate-raising policy, considering the
current rigid currency-exchange regime, will be
self-defeating. The higher interest rate for the
yuan compared with the US dollar's and the higher
expectation of more yuan appreciation and of more
money pouring into China resulting in more
excessive liquidity will put more upward pressure
on prices.
So far, Beijing's macroeconomic
adjustment and control measures have largely been
nullified by diehard structural problems. The
government has used every weapon available:
monetary policies, fiscal policies, administrative
means, and environmental protection measures.
Still, inflation is looming.
The situation
casts more doubts on the effectiveness of
Beijing's macroeconomic control policy that has
been put into effect over past more than four
years. In fact, the strong impulse to overheat the
economy is deeply embedded in the structure of the
China's politico-economic structure, and the
current tightening policies from monetary, fiscal,
and industrial fronts do no more than deal with
short-term issues.
The National People's
Congress has become impatient with the
ineffectiveness of the four-year belt-tightening
policies. During a meeting aimed at reviewing the
macro-regulation policy held by the NPC Standing
Committee, a member said: "This round of
macroeconomic control has continued for four
years, and while a number of policies have been
carried out by a relevant departments of the
central government, the effect is not evident."
The legislators also suggested that the
State Council evaluate the effectiveness and the
role of the policies and measures. The idiom of
only treating the symptoms of the disease rather
than tackling the disease itself has been used to
criticize the current policy as passive, only
focusing on short-term issues and then doing so in
a haphazard way.
What worries the
legislators is that the growth is unsustainable
but virtually unstoppable. The myth of China's
robust growth has recently been decoded by more
and more economists inside and outside China.
Pieter Bottelier, professor of China economy at
Johns Hopkins University, points out that China's
economy can be described as four imbalances:
investment-consumption imbalance, energy-demand
imbalance, social imbalances, and
growth-environment imbalance.
But the
Chinese government seems likely to give priority
to popular issues, such as housing prices. In
fact, the government failed to contain soaring
housing prices in cities from the coastal area to
inland China simply because it implemented
policies that gave the market a strong signal that
the prices will continue to rise. In China,
housing prices can be more of a social issue or a
political issue than an economic one.
In
fact, local governments have been making use of
local economic development and urban sprawl as
means to boost their revenues (and to enrich local
officials in some cases). Collusion between
property developers and local-government officials
has often occurred, with profits in housing
projects shared among them. No local officials are
really keen on in providing affordable housing to
residents.
Both the central and local
governments appear to be awash in cash. But the
overhaul of China's social programs - pillars for
the "harmonious society" - is long overdue and the
programs are poorly funded. Beijing policymakers
think a sound social-security system would help
people reduce precautionary savings and boost
consumption. But that good intention has been
distorted as social-security funds are easily
embezzled by local-government officials to pursue
local growth in gross domestic product.
The NPC Standing Committee suggested that
the central government allocate "sufficient funds
and precious resources" for the weak links in
China's society and economy: education, health
care, social security, affordable housing, and
rural development.
The short-term
complication of China's economic environment and
the long-term politico-economy structural issues
will be put to a test at the 17th National
Congress of the Chinese Communist Party in
mid-October. Although the guidelines of
"scientific development and harmonious society"
are in the right direction, how to implement them
remains a big challenge for the party.
Zhou Jiangong is a
Shanghai-based analyst on China's economic,
political and foreign affairs.
(Copyright 2007 Asia Times Online Ltd.
All rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
