China is going to attempt the almost impossible in 2011; it’s going to tighten monetary policy, while attempting to keep the economy growth a sustainable pace.
Either through more rate rises and other measures, the country is going to be engaging in a delicate balancing act that will be of considerable interest for Australia, hitched as we are to the Chinese economy’s future course.
It sounds like a near impossible task and one the country’s regulators have been trying to achieve for most of this year without too much success.
It will be a very difficult task, especially with the economy looking like its rebounding from the mid-year pause.
There was one interest rate rise in October and frequent rumours of another one.
The Shanghai stockmarket fell 5.3% in November after the two increases in bank reserve asset ratios in the month (there have been five so far this year).
In June, China ended the crisis policy of pegging the nation’s currency to the dollar.
But the increase has been small since then and the Yuan has actually fallen against the yen and the won.
China’s one rate rise (the first in three years) compared to the four in Australia, two in New Zealand and South Korea, six in India, and three in Thailand and Malaysia.
But the most important part of the news, announced on Friday on the Xinhua official website, is that the decision wasn’t been made by the central bank, or the state planning commission, but by the Communist Party’s most powerful organisation, the Politburo.
Xinhua reported that the Politburo, the elite team led by nine members at the top of the Communist Party, had decided that China’s monetary policy should shift “from relatively loose to prudent next year”.
The report also said China “will continue its proactive fiscal policy”, meaning that investment spending would not be severely curbed.
It could see the Chinese currency appreciate, but the move is all about tackling rising inflation head on.
That the decision was made by the Communist party’s most powerful group means the party’s concerns about the damage to ‘social harmony’ from the high levels of inflation, especially food prices, are very high.
They must fear an outbreak of public disorder as we saw in parts of China in 2008.
Already there have been reports of minor protests at rising food/meal prices, especially in cafeterias and other outlets.
Inflation is running at an annual rate of 4.4% in the 12 months to October and there have been reports on Xinhua and other sites that it will rise to 4.7% this month.
Chinese economic data starts being released this Friday with the trade data for November, but inflation and industrial production will be out a week today.
Xinhua said, "The Political Bureau of the Communist Party of China (CPC) Central Committee agreed in a meeting, chaired by President Hu Jintao, also general secretary of the CPC Central Committee, that the country would continue the proactive fiscal policy next year.
"To accelerate the transformation of the economic development pattern should be the main focus of next year’s work, and macro-regulation should be "more targeted, flexible and effective," according to a statement issued by the bureau.
"In late 2008, China shifted its fiscal policy from "prudent" to a "proactive" stance and eased monetary policy from "tight" to "moderately loose" to counter the global financial crisis.
"That came with a 4-trillion Yuan stimulus package which largely fund infrastructure construction and improving people’s livelihood.
"China’s decision to implement a moderately loose monetary policy over the past two years was a "special move" to counter the global financial crisis, which should be ended now as the domestic economy’s growth has stabilized, said Prof. Zhang Liqing with the Central University of Finance and Economics.
"Xia Bin, director of the finance research institute under the State Council’s Development Research Center, said shifting to a prudent monetary policy will help promote China’s sustainable growth.
"It is time for change with the domestic economy maintaining its strong momentum and with inflation running at a high level as liquidity from abroad grows."
China’s economy grew 9.6% year on year in the third quarter this year, slowing from the 11.9% rate the first quarter.
There are forecasts that growth this quarter will be under 10% because of the slowing measures, but other forecasters say the economy now seems to be expanding.
This renewed growth momentum was seen in the expansion in manufacturing seen in the two main surveys for November.
New loans in the first ten months of the year totalled 6.9 trillion Yuan, slightly less than the government’s full-year target of 7.5 trillion Yuan.
Analysts say November new loans are likely to have exceeded 500 billion Yuan.
The Political Bureau statement said more efforts would be made to ensure market supplies, stabilize prices and regulate market order next year.
It noted the nation has faced complicated social and economic conditions since early this year.
Thanks to the stimulus package and efforts to speed-up economic restructuring, China has maintained relatively fast economic growth, it noted.
"The momentum of economic and social development has been consolidated.
