A Tight and Cool 2008

The meeting asserted that along with its own domestic troubles, China also bears the burden of sitting in the midst of a complicated and challenging international environment. Further, the upcoming year will have to deal quite a few issues: "fast economic growth has yet been eased off enough to keep from overheating, there will be huge pressures on prices to rise, the agricultural foundation is still fragile and environmental pollution is still severe."

According to an announcement after the meeting, " The primary goal of 2008’s economic polices will be to prevent the economy from accelerating too fast and overheating and, to keep the structural prices rises from turning into obvious inflation."

Many investors (or speculators) have long claimed that the Beijing 2008 Olympic Games will create a great feast in China’s capital market, which will inevitably leave the market hungover when all is said and done. 

Publicly, however, the government has yet to alleviate such concerns and maintains that the current inflation is structural in nature and mainly due to the increase on the value of foodstuffs.  But during their meeting, they must have observed that a comprehensive rise in prices is well underway, especially with the upcoming Olympic games, and therefore they made it loud and clear that without a tighter monetary policy and a stable fiscal policy, there will be a big problem in 2008.

Particular mention was made to monetary policy. This is the first time since 1997 that the government is shifting it primary focus onto monetary policy and thereby expanding the role of the Central Bank in solving economic dilemmas.

Some economists regard this meeting as demonstrating obvious efforts by the central government to calm people’s fears of a redlining economy--too hot to handle. The meeting sends a clear signal to the market that the authorities, including the central bank, will be ready to deal with inflation with any and all options available. "Some people are hoping for luck, but the central bank’s determination to is very clear." Hua Sheng, a economist and President at YanJing Overseas Chinese University, told China Business News(CBN).

"At the moment, there is the risk of the economy overheating, of prices increasing too fast and of assets bubbling. For those reason, a tight monetary policy is extremely necessary," he added.

Ha Jiming, chief economist at CICC (China International Capital Corporation) said that there are already indications of a stricter monetary policy whose effects will be further reflected on the market next year.

Most economists now regard solving the inflation predicament as the anchor for next year’s economic policy. "From the perspective of prices, economic researchers will examine the overall impact and compatibility of the macro-economic control," said Zhang Yusheng, a researcher at the National Development and Reform Commission (NDRC).

With the anticipated upward surge of inflation in 2008, the government might also move forward on reforming the prices of natural resources.  China's resource-related goods are so cheap that investment in the manufacturing sector based on the consumption of natural resources keeps growing. Fundamentally, the government cannot cool down the economy without raising prices on natural resources. In the short term the reform may put more upward pressure on inflation, but in the long term, it will improve the structure and balance of the Chinese economy.  In a way, the government wants to get both the fish and the bear's palm, which is a Chinese way of saying ‘have the cake and eat it too.�In other words, the government wants to control inflation and to fix the structural problem simultaneously. In order to realize this, it is ready to subsidize if inflation hits hard on low-income households.

The government still plans to increase spending on a series of social programs such as social security, medicare and education along with building more low rent housing. These policies should raise incomes as well as help cool a sweltering economy.

Right after the meeting, the People’s Bank of China, China’s central bank,  announced that they would further strap in its own policies and take strong measures to strengthen liquidity management, further improve the RMB exchange rate regime, and balance total demand-supply with international trading.

The central bank, in order to do their part in constraining monetary policy, will also: increase the range of RMB appreciation, further raise interest rates, continually raise the deposit-reserve ratio, issue more bank notes and control the scale of credit loans.

But many are concerned that, against the backdrop of America’s current interest rate reduction, China’s central bank must wisely tune its own rates lest they set them too high thereby inviting an influx of capital. 

After standing strong against all the pressure from the US, Europe and Japan to pick up the pace on RMB appreciation, the Chinese government has finally, albeit of its own accord, decided to take precisely such action.