China Ecomomic & Monetary Policy Trend
Economic Development, The Monetary Policy & The Foreign Exchange China is naming a new generation of economic leaders just as its breakneck growth is slowing. The officials to be appointed at the National People's Congress that starts in Beijing including former Beijing Mayor Wang Qishan and Politburo member Li Keqiang, may have to reach deeper into an economic toolkit that mostly has been used to cool expansion. China has already paused after raising interest rates six times in 2007. Wang, 59, and Zhou Xiaochuan, 60, who economists say is likely to keep his job as central-bank governor, will need to tame inflation that is at an 11-year high without triggering a sudden slowdown. China's concerns are going to shift from the economy being too hot to potentially becoming too cold. We'll see an end to the interest-rate hikes, an end to bank reserve requirement hikes, and we will also see an end to the appreciating currency. Policies will be shifting from focusing on too hot towards a more balanced approach. They will emphasize the need to maintain very stable and relatively strong growth. The failure to tame a surge in food prices since 2007 has led to stampedes, injuries and deaths at shops selling discounted cooking oil, rice and eggs, illustrating the toll on the 300 million Chinese estimated by the World Bank to be living in poverty. Inflation is clearly a big problem, the most destabilizing factor right now. It's going to be a big challenge how to bring down inflation without a hard landing; achieving a soft landing is the most important task. When those economies slow, that is going to slow demand for China's exports and hurt its economy. That is brewing right now. … dated March 2008 --------------------------------------------------------------------------------------------------- The People's Bank of China has no intention of relaxing monetary policy because the risk of broad-based inflation is still serious Economists have started to speculate that the central bank might soon end its three-month-old tightening campaign to support economic growth in the face of weakening export demand and disruptions to output caused by blizzards across southern China. But Wu Xiaoling, who retired recently as a vice governor of the PBOC, said it was important to keep a grip on the money supply in particular when inflationary pressure is on the rise. "I want to stress this because recently there have been some media appealing -- incorrectly -- for the central bank to relax its controls. She said monetary policy would rely more heavily on the exchange rate, open market operations and reserve requirements in 2008 as U.S. interest rate cuts had reduced the PBOC's room to manoeuvre on rates. The U.S. rate cuts have narrowed the scope for the Chinese central bank to use interest rates as an economic control tool. China will make more use of quantitative tools and the exchange rate mechanism in adjusting the economy. China would not decouple from the U.S. and the global economy, so any slowdown in the rest of the world would have an impact on China. But she said a slowdown would give China an opportunity to hasten the shift in its growth model away from exports. For China, the biggest challenge is not a drop in external demand but rather domestic restructuring. Wages and resource prices should be allowed to rise over the longer term. Some international banks would run down their foreign-asset positions to shore up their balance sheets following losses incurred during the U.S. subprime mortgage crisis. That would mean less upward pressure on the yuan, thus opening an opportunity for China to accelerate reform of its currency regime.
Their task is complicated by the prospect of weaker global demand in 2008 for exports, a main driver of the world's fourth-biggest economy.
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