China's interest targeted on harmony
By Leanne Wang
HONG KONG - The Chinese government, keen to promote domestic growth as exports
to key markets are hit by the global financial crisis, is expected soon to
follow the Hong Kong Monetary Authority and Australia in slashing interest
rates.
While other countries are cutting rates particularly to improve liquidity in
their financial systems as concerns about the global financial sector reduced
banks' willingness to lend to each other, China is concerned that it maintains
growth to avoid social instability.
The Hong Kong Monetary Authority, which acts as the city's central bank,
effectively allowed a one percentage point interest rate reduction to 2.5%, as
of Thursday. Unusually, the HKMA
acted in advance of rate moves in the United States, which it typically follows
to help maintain the local currency's peg to the US dollar. The Reserve Bank of
Australia this week cut its benchmark interest rate one percentage point,
taking the overnight cash rate target to 6%.
China last cut the one-year lending rate on September 15 by 0.27 of a
percentage point, the first reduction in six years. A commentary in the China
Securities Journal on Wednesday said conditions are "ripe'' for a rate cut.
Measures already taken to boost domestic consumption include expansion of a
pilot scheme to give financial subsidies for farmers to buy home appliances.
The United States, China's biggest export market, may already have entered a
recession, while the expanding financial crisis may slow global growth next
year to 3%, according to an International Monetary Fund forecast in the draft
of its latest World Economic Outlook, Bloomberg reported. The IMF in April
predicted 3.7% growth.
If gross domestic product (GDP) growth in the US slows by 0.7 of a percentage
point, China's GDP growth will drop 0.94 of a percentage point, according to a
study by the Chinese Academy of Social Sciences.
Just under 20% of China's exports, or US$232.7 billion worth, out of a total
valued at $1.22 trillion, were sent to the US last year, equivalent to 33% of
China's total GDP of $3.6 trillion. That excludes re-exports to the US from
Hong Kong and Taiwan.
US consumers, increasingly straightened and unable to obtain credit, are
turning away even from China-made goods, slowing growth in China's exports to
the US to single digits for the first time since 2002. Growth in these exports
in the first seven months of the year slowed to 9.9% year-on-year to a total of
$140.39 billion, down 8.1 percentage points from the same period last year,
Chinese Customs data show.
Manufacturers, already battling to absorb commodity prices that are rising
twice as fast as the value of Chinese exports, are facing further hits from
their other leading market, the European Union, as the financial crisis
spreads.
Net export growth is tumbling from admittedly remarkable highs which hit a peak
of 162% year-on-year growth in February. In real terms, exports grew 12.6%
year-on-year in the first eight months in 2008, down from 20.2% in 2007,
Barclays Capital estimates.
Falling export growth could help cause GDP growth to slide to 9% in the fourth
quarter, from an estimated 10.2% third-quarter expansion, 10.4% in the
April-June period and 10.6% in the first three months of the year, the State
Information Center forecasts.
Growth of 9% is generally considered the minimum for China to provide enough
jobs for new labor, prompting speculation that the government will institute a
raft of measures to defend that line, including an easing of restrictions on
fixed-asset investment.
In recent years, Beijing has walked a tightrope of seeking to rein in inflation
and overinvestment in an overheating economy while boosting domestic
consumption to head off friction with trade partners complaining about the
government allowing its currency to remain artificially weak to maintain export
levels.
Last year, retail sales grew 16.8% to 8.921 trillion yuan (US$1.3 trillion),
equivalent to 36% of GDP. Even so, that leaves huge room for growth before
domestic consumption becomes the largest contributor to GDP. Allowing for
inflation, retail sales grew 15% year-on-year in the first eight months this
year, compared with 12.3% in 2007, NBS data showed.
Personal consumption has been supported by strong income growth, boosted by the
robust economy, while some firms are now paying employees the traditional
annual bonus in monthly installments for the purpose of tax deduction. Even so,
income growth has also been slowing as the economic growth declines. Real urban
per capita income rose 6.3% in the six months to June, compared with more than
10% annually between 2002 and 2007, NSB figures showed.
As the US financial crisis started to spread late last year and early in 2008,
Beijing stepped in to boost domestic consumption, reversing earlier tightening
measures. The Ministry of Commerce introduced a pilot scheme entitling each
rural family in Shandong, Henan or Sichuan provinces to a 13% government rebate
on the purchase of up to two television sets, two refrigerators and two mobile
handsets.
This was Beijing's first initiative to boost domestic consumption by directly
granting financial subsidies to consumers in rural areas, where populations
have benefited less than coastal provinces from the country's economic boom.
Effectively, the government is taking money out of one pocket to put in
another, as it also offers a 13% tax rebate for exports of home appliance
items. Mainland media have speculated that Beijing might raise the export
rebate rates to offset the effect of a stronger yuan.
The effect of granting subsidies to farmers who purchase these goods is to
remove a policy bias towards exports and spur manufacturers to tap the huge
pool of potential consumers in rural areas.
Plans to expand the pilot scheme to another 12 provinces and other home
appliance items was halted after the devastating 7.9 Richter scale earthquake
hit Sichuan on May 12. But China Central Television has said the scheme worked
so well that Beijing was likely to expand it.
The Ministry of Commerce recently confirmed that it has worked out an expansion
plan that, seconded by the Ministry of Finance, would be presented to the State
Council, or cabinet, for final approval.
A queue of home appliance producers, such as electronic appliances maker
Changhong, white-goods manufacturer Haier and TV-maker Konka, which have been
bidding to join the scheme, are readjusting their production plans and training
dealers to push into the rural market.
"This is really good news for us. We've been very much worried that
slowing-down exports will hurt our profitability," said a sales manager at
Shenzhen-based TV-manufacturer Skyworth.
The advent of a market economy over the past three decades has brought the loss
of the "iron rice bowl", further encouraging Chinese to save against the event
of illness, job loss and for their children's education.
With that in mind, Beijing is also seeking to improve the country's social
welfare and social security systems, extending them to cover rural residents.
That should not only help boost consumers' sense of security and reduce their
need to save for hard times, but is also in line with Beijing's goal of
building an "harmonious society".
This year, the Chinese government has also scrapped all agricultural taxes,
increased subsidies on farm produce, ended fees for primary education across
the country and introduced medical insurance in rural areas.
The income floor for personal income tax has been raised to 2,000 yuan (US$293)
per month from 1,600 yuan effective from March 1, 2008, benefiting low-to-mid
income residents.
The government has also improved purchasing power by tackling inflation.
Premier Wen Jiabao in March said that a target inflation, measured by the
Consumer Price Index (CPI), at around 4.8% this year. CPI inflation in August
fell to 4.9%, compared with a 12-year high of 8.7% in February.
China's tight monetary policy, which included raising its reserve ratio
requirement for banks to as high as 17.5%, was introduced at the end of last
year to tackle excessive investment and bank lending. The policy has
effectively cooled down the overheating economy, hitting in particular the
high-end real estate market and forcing many small and highly polluting
manufacturers with low cash-flow to close.
Beijing is now reacting to a sharper-than-expected decline in industrial output
growth in August to 12.8%, from 14.7% in July, and the prospect of spillover
effects from the global financial turmoil.
On September 15, the People's Bank of China's cut the benchmark one-year
lending rate by 27 basic points to 7.2% and the reserve requirement ratio by
100 basic points to 16.5% for smaller banks.
The benchmark lending rate may be cut by a total of 81 basis points in the next
12 months and the deposit rate by a total of 54 basis points, said Barclays
Capital economist Peng Wensheng.
The easing policy is considered to be aimed at helping small and medium-sized
businesses gain access to bank credits, rather than helping the new rich class
hurt by the bursting of the country's equity and real estate bubbles.
Property developers such as China Vanke and Shimao Property Holdings were
reported last month to be cutting apartment prices by 15% to 35% in a bid to
push through sales. Chinese housing prices may drop as much as 50% over the
next few years, according to insurer PICC Property & Casualty Co, the Hong
Kong-based South China Morning Post reported last month.
That will help bring prices down to affordable levels for more of the growing
middle-class, while an expected easing of fiscal spending will increase
investment on and employment in still much-needed infrastructure, such as
underground mass transit systems.
Leanne Wang is a journalist based in Hong Kong.
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