Since the start of the year, news stories causing concern have
appeared around the world.
The United States is seeing an increasing negative influence
from the subprime crisis on its financial market. Stock markets
around the world have seen dramatic ups and downs in the last week
while the Chinese stock market has also fallen. Heavy snowstorms
have hit many parts of China causing huge damage to the
economy.
Many say the Chinese authorities should reconsider the tight
monetary policy currently in effect.
Their concern is not baseless for the economic situation in and
out of China does not allow for too much optimism. Capital markets
around the world are stumbling. China and the US are also seeing a
narrowed difference in their interest rates.
However, these facts are far from adequate for the Chinese
authorities to change the tight monetary policy.
Many world market analysts believe the US economy is entering a
recession because of the subprime crisis. But it is still too early
to make this judgment.
Admittedly, the subprime crisis has hit the US economy badly,
but its negative influence is unlikely to pull the US into
recession.
The real serious problem in the US economy is the rapid
devaluation of the dollar. The depreciation has lowered the
purchasing power of individual consumers who buy commodities priced
in US dollars. It has also driven up the prices of major
commodities on the international market.
As a country whose imports exceed its exports every year, the US
finds its imports much more expensive now and this could severely
affect domestic consumption.
But the fundamentals of the US economy have not been changed, so
it might be able to shrug off the subprime crisis as long as the US
dollar stops its slide.
At the same time, the Chinese economy is still in high speed
growth and it has been so for the past three decades. This growth
momentum could carry on for next three decades because the Chinese
economy still has great potential for further development.
China has a huge economic disparity among different regions and
among different sectors. This disparity, long viewed as a
disadvantage, could be turned into a force driving the economy
forward under proper guidelines by the authorities.
The heavy snowstorms hitting China have caused huge financial
losses. It has also affected the daily life and travel plans of a
big portion of the country's population.
However, the damage is only temporary. The economy will quickly
resume its normal track and pace once the weather changes.
In China, there has been overcapacity in many industrial
sectors. Combined with the efforts from the governments at all
levels, this overcapacity will help erase the negative influences
posed by the natural disaster.
China's economic development has relied on urbanization and the
boom in the property market after 2000. The two engines are not
going to be changed by stock market fluctuations or snowstorms.
Figures from the National Bureau of Statistics (NBS) suggest
that the business cycle index was 121.3 in December last year,
while the ideal level should be 100. This hotter-than-normal status
of the macro economy was maintained for several months last
year.
The NBS estimates that China's GDP in 2007 will be 24.7 trillion
yuan, 11.4 percent higher than 2006. This figure is much beyond the
target of 8 percent. And it is the fifth year in a row that the
Chinese economy has achieved double-digit growth.
Since July last year, China's exports have grown robustly, the
foreign exchange reserve has kept on rising, new bank loans reached
their annual ceiling months before year-end, and investment in
fixed assets has stopped declining.
All these signs back one conclusion: the Chinese economy is
overheating.
Although the official rise of the consumer price index (CPI) for
2007 was only 4.8 percent, the system for calculating the CPI is
defective, the rise was not mirroring the true rise in prices for
essential goods. If the authorities decide to loosen the monetary
policy according to the 4.8 percent growth, it would be a
misunderstanding of economic performance.
Despite the authorities' efforts to control price rises through
administrative means, the prices might rise again this year, both
on the international market and on the domestic market due a
shortage of certain commodities caused by the snowstorms.
Therefore, if the Chinese central bank followed the US Federal
Reserve and loosened its monetary policy, it would not only hinder
efforts to prevent the economy from overheating, but also add more
bubbles to the stock and property markets. It might even push the
consumer price index even higher, or cause other unforeseeable
damage.
The authorities should firmly stick to its tight monetary policy
as it is essential to maintain the economic soundness of China
under the prevailing conditions.
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(China Daily?January 31, 2008)
