No cooling China's economic
engine By Zhou Jiangong
SHANGHAI - The worst snowstorms in 50
years that devastated central and east China
before the Spring Festival or lunar new year may
have slowed the country's economic growth
sufficiently for the government to ease
macroeconomic controls targeting overheating,
argue some analysts.
Past experience,
however, particularly after the acute respiratory
syndrome (SARS) outbreak in early 2003, suggests
the economy will tend to grow faster in the
aftermath of the storms. We might therefore expect
Beijing to maintain its controls as the snowstorms
will not help rein in excess liquidity or reduce
inflationary pressures.
The winter weather
paralyzed transport, disrupted power supplies
and
prevented millions of rural migrant workers from
heading home to share the Spring Festival holiday
with their families. They also helped the stock
markets continue declines that have brought
benchmark indices down 22% this year.
The
dismal weather also had an international impact,
helping to drive coal prices to a historical high
on the world market. As Chinese factories shut
down amid power outages, the price of some
commodities such as zinc and copper soared to
recent highs. Interruption of transport between
the central and coastal regions and even between
some coastal provinces also affected the supply
chain of the world manufacturing system.
The biggest concern for economic
decision-makers in Beijing is the impact the
disruptions will have on inflation. Added to
strong demand for food and consumer goods during
the Spring Festival, they could drive the consumer
price index in January up as high as 10%, some
analysts estimate. Shenyin Wanguo Securities has
projected a rise of 6.8% in January, 0.3 point
higher than in December, compared with an 11-year
peak of 6.9% in November.
Further clouding
the future is the risk of a global economic
slowdown caused by a possible American recession,
which could significantly curb China's exports
this year. The external environment for the
country's economic development could therefore be
tough. Under such circumstances, economic growth
definitely will slow dramatically if China
continues to tighten its monetary policy. Thus the
call by some economists for the government to
loosen monetary policy.
China began to
tighten monetary policy from the beginning of this
year following a decision by the policy-making
Central Economic Work Conference in late December,
ending a decade-old "expansionary" approach.
Gross domestic product (GDP) growth for
January is forecast to be slower due to seasonal
factors and the effect of the snowstorms. The
World Bank has adjusted its projection for China's
2008 GDP growth down to 9.6% from 10.8%. It
changed its outlook for inflation up to 4.6% from
3.8%.
Natural disasters frequently bring
shocks to the economy. In 1998, devastating floods
on the Yangtze River coincided with the Asian
financial crisis, tending to slow down the Chinese
economy. To counter the negative impact on
exports, the government began to adopt
expansionary fiscal and monetary policies to boost
investment and domestic consumption so as to
sustain high-speed growth.
The aftermath
of the outbreak of the severe SARS epidemic in
2003 may be more relevant to the current
situation. When the epidemic broke out, the
economy was at the upward stage of the cycle and
concern was raised of an economic slowdown. Yet
shortly after the outbreak, pent-up demand erupted
and since then double-digit annual growth has been
sustained through to the end of 2007.
That
may encourage Beijing to keep alert for a possible
early post-blizzards rebound in investment that
could drive the economy back to the perennially
overheating state the government has been working
very hard to cool.
Furthermore, the chief
target of China's economic policy is to keep
inflation at bay. Senior officials at the People's
Bank of China, the country's central bank, have
publicly said the tightening monetary policy would
continue.
The National Development and
Reform Commission, which oversees economic and
industry policies, has concluded that the
snowstorms will not have any significant impact on
the fundamentals of the economy.
Already,
as a semblance of normality returns, Beijing is
allocating funds for reconstruction plans. The
cash will go on infrastructure such as roads,
railways and the power grid. Plants will resume
production and coal mining will pick up. Rural
migrant workers will return to coastal
export-oriented factories. The economic engine of
China will soon be roaring again.
Beijing
still has to grapple with excess liquidity. An
expansionary US monetary policy will likely lead
to more money being parked in China given that it
is tightening its monetary policy, which includes
raising interest rates. Higher benchmark rates
will lure more money into China as investors
gamble on profiting from higher returns and
currency appreciation.
As China's exchange
rate regime is still rigid, a tightening monetary
policy is largely self-defeating since the
government has to issue more money to buy
inflowing foreign currency and keep the exchange
rate within the targeted fluctuating band.
Therefore, excess liquidity and high
inflation are still a threat. Effectively, the
country's monetary policy is in a Catch-22
position: high inflation requires higher interest
rates, yet these will generate more liquidity,
which may add to upward pressure on prices.
Some analysts fear the risk of an
overtight monetary policy if pursued amid a
concurrent global slowdown. A bunch of government
think-tanks and investment banks have already
lowered projections for China's GDP growth rate
this year to as low as 8%. The World Bank's most
recent forecast of 9.6% compares with growth of
11.4% in 2007, the fifth consecutive year of
double-digit growth in output.
Nevertheless, the post-winter
reconstruction and investment, added to the
momentum of domestic consumption, will leave
China's economy well placed to offset any slowdown
in exports.
Zhou Jiangong writes
analyses on China's economy, finance and
international affairs. Based in Shanghai, he is
now editor of www.chinastakes.com, an
English-language financial review of China.
(Copyright 2008 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
