In uncharacteristically blunt language, China’s Premier, Wen Jiabao, used the occasion of his annual press conference following the conclusion of the National People’s Congress to send a very clear message about the state of the Chinese economy. He explicitly characterized macro conditions as “unstable, unbalanced, uncoordinated, and unsustainable.” I have never known a senior policy maker or political leader anywhere to leave it like that without rising to meet his own self-imposed challenge. Premier Wen has put his reputation firmly on the line.
Stephen Roach -- Morgan Stanley Global Economic Forum
March 19, 2007 -- NEW YORK -- Those were not my words -– at least not when I heard them firsthand in Beijing, last Friday, 15 March. In uncharacteristically blunt language, China’s Premier, Wen Jiabao, used the occasion of his annual press conference following the conclusion of the National People’s Congress to send a very clear message about the state of the Chinese economy. He explicitly characterized macro conditions as “unstable, unbalanced, uncoordinated, and unsustainable.” I have never known a senior policy maker or political leader anywhere to leave it like that without rising to meet his own self-imposed challenge. Premier Wen has put his reputation firmly on the line. China, in my view, now has no choice but to continue tightening as it attempts to bring its rapidly growing and unbalanced economy under control.
The ink was barely dry on the Premier’s observations when China’s central bank followed the next day with a rare Saturday announcement of an immediate monetary tightening -– the third interest rate hike in 11 months, which reinforces five increases in bank reserve ratios implemented over the past nine months. The latest 27 basis point hike in the policy lending rate came only a day after Zhou Xiaochuan, Governor of the People’s Bank of China, sent a crystal-clear warning, “… (F)rom a macro perspective, after serious study, we decided to place further controls.” In central banking circles, it doesn’t get any more direct than that. Suddenly, China’s once opaque policy authorities are amazingly transparent –- owning up to the seriousness of their macro control problems and setting in motion what I believe will ultimately be a much more determined shift to policy restraint than has been evident in a long time.
To some extent, this shift has been data driven. While China’s January-February statistics are always hard to read because of Lunar New Year’s distortions, there can be no mistaking the reacceleration of economic and financial activity in early 2007. Over the first two months of this year, export growth surged to 41.5% y-o-y –- a dramatic acceleration from the still rapid 27 percent pace of 2006. Similarly, average growth in fixed asset investment came in at 23 percent in January February 2007 –- little changed from the 24 percent pace of 2006 and far from the long-sought slowdown of this overheated sector that now makes up over 45 percent of Chinese GDP. At the same time, industrial output growth reaccelerated to 18.5 percent in the first two months of this year –- reversing the deceleration to sub-15 percent readings in late 2006 and close to the peak comparison of 19.5% evident last June. Moreover, despite a seemingly determined monetary tightening campaign, bank lending growth reaccelerated to nearly 17 percent over the January-February period –- well above the 13 percent pace in 2006; RMB loans in February, alone, were nearly three times those extended in the same month a year ago. Finally, on the heels of the spike in export growth, the trade surplus ballooned to nearly $24 billion in February -– fully nine times levels hit a year earlier; that signals what most senior Beijing officials believe to be a very rapid accumulation of foreign exchange reserves in early 2007, which only further complicates China’s already daunting liquidity management challenge.
In short, the data flow in early 2007 depicts a Chinese economy that is once again defying the efforts of a three-year tightening campaign. With the exception of a few soft months over the past three years, a white-hot Chinese economy has largely been unresponsive to the current off-and-on tightening efforts that were first initiated in the spring of 2004. Beijing has talked tough on the macro control front, but this talk has not achieved satisfactory results. Persistent excess liquidity, in conjunction with a still highly fragmented banking system and an investment decision-making process that is driven mainly by provincial and local considerations, have undermined policy traction. As Premier Wen Jiabao indicated at the conclusion of the National People’s Congress on 15 March, this is a major challenge to the Chinese leadership. He left little doubt as to his intent by adding this is “… not the time for complacency with respect to the economy.” Quite simply, the Chinese leadership cannot afford to let the world’s fourth largest economy lapse back into the boom-bust pattern of yesteryear. In my view, Beijing seems quite focused on delivering on the macro control front in 2007.
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