China confirms inflation enemy
number one By John Ng and
Olivia Chung
HONG KONG - Chinese Premier
Wen Jiabao, warning that inflation and overheating
remain key threats to the economy, told the
country's parliament that more measures would be
taken to curb price rises and rein in lending.
Major tasks of this year’s macro-economic
controls are "to prevent economic growth from
shifting to overheating from relatively fast
growth, to prevent structural price rises from
becoming entrenched inflation," Wen said in his
keynote government work report to the opening of
the annual session of the National People’s
Congress (NPC), in Beijing on Wednesday. His
speech was broadcast live on China Central
Television.
Wen pledged to carry out a
"tight" monetary policy this year because of the
strong possibility of a rebound in
fixed-asset
investment, excessive money supply
and lending, and excess liquidity and inflationary
pressures have yet to be eased. Therefore
"financial controls need to be strengthened, and
the excessively fast growth in money supply and
lending should be curbed," he said.
At
present, China's key lending and deposit rates are
7.47% and 4.14%, both at nine-year highs.
Commercial banks are required to set aside 15% of
deposits as reserves. The government also curbs
lending via direct instructions to lenders. This
has not stopped inflation - which reached 7.1% in
January - from accelerating to the fastest pace
since 1996.
Wen vowed to take more
measures, including price controls, to tame prices
while avoiding triggering a sharp slowdown as US
export demand weakens. "Uncertainties and
potential risks in the international economic
environment are increasing," Wen said, citing the
effects of the US subprime meltdown.
The
government aims to cap price hikes at 4.8% for the
whole of this year, the same as the rate in 2007,
Wen said. Last year's inflation was the highest in
11 years.
In Hong Kong, economist Ma
Tieying said in a TV interview with "now News" that
Wen’s report was an elaboration of policy
principles set by the government's Central
Economic Work Conference in December. The
conference set two main goals for 2008: to prevent
the economy from overheating while keeping
relatively high-speed growth, and to prevent
structural prices rises from becoming entrenched
inflation.
"China is caught between a
global slowdown led by the US and soaring
inflation at home. The Chinese government is aware
that the home economy is becoming more difficult,
so it will not relax its macro-economic controls,"
he said.
Ma said the government was now
likely to take more monetary policy measures to
curb credit, such as raising the deposit reserve
ratio and interest rates.
JP Morgan said
in a research note that Wen affirmed that the
government policy of supporting solid, sustainable
economic growth has not changed. "The authorities
are aware of the growing external risks and the
report stressed that the macro control will be
kept reasonably flexible in order to achieve this
year's macro policy goals including stable and
'relatively fast' growth. As such, we believe the
content of Wen’s keynote speech is much more
benign for growth than the market has been worried
about."
The premier reiterated an 8%
growth target for gross domestic product (GDP)
growth this year, unchanged from last year. It is
generally expected real growth will exceed this.
The economy expanded 11.4% in 2007, the fastest
pace in 13 years, to reach 24.66 trillion yuan
(US$3.46 trillion), becoming the world’s fourth
largest, (after the United States, Japan and
Germany in US dollar terms), Wen said.
JP
Morgan said that setting an official GDP growth
target well below actual current growth rates
signaled concern about overheating and a
preference for more balanced and sustainable
growth.
"The implication is that they will
assert an increasing emphasis on supporting
domestic demand and gradually rebalancing external
trade, as well as on environmental concerns and
energy conservation," JP Morgan said.
JP
Morgan said it held to its 2008 real GDP growth
forecast of 10.5%, with steadily strengthening
domestic demand and moderating export growth. An
earlier forecast by the State Council Development
and Research Center predicted GDP growth this year
could slow to 10.5% as export demand weakens.
A record trade surplus pumped US$262
billion into the financial system last year. Money
supply grew at the quickest pace in 20 months in
January. As part of the country’s efforts to
narrow the trade gap so as to curb money supply,
Wen pledged to allow greater flexibility in yuan’s
exchange rate. China has allowed faster gains by
the yuan this year, cutting import costs and
pushing up export prices. The currency has risen
almost 3% against the US dollar in the first two
months of this year after gaining 7% last year.
Some analysts forecast the yuan could rise to 6.6
yuan for one US dollar by end of this year from
the current 7.12.
Wen promised the Chinese
government will accelerate financial reforms and
strengthen regulation and supervision. One target
of financial reforms is to "optimize the structure
of the capital market, to promote the healthy and
stable development of stock market", he said. This
year a Nasdaq-like growth enterprise board will be
launched, Wen said, adding that China will also
speed up the development of bond market and "make
steady progress" in developing futures market.
An editorial in the People’s Daily, the
Communist Party’s flagship newspaper, last month
said the growth enterprise board would be launched
in the first half of this year. Index futures are
also likely to be marketed this year, though a
timetable has yet to be set.
Andrew Wong,
associate director of One China Securities Limited
in Hong Kong, said the launch of a growth
enterprise board and index futures were steps in
the right direction as they could help reduce the
volatility of China’s security market and thus
favor the healthy development of the country's
fledgling stock market.
He expected a
timetable for introduction of index futures to be
made public in the second quarter. "In order to
satisfy the strong demand for fund raising by
small- and medium-sized enterprises, particularly
privately run ones, Beijing should launch the
growth enterprise board. However, a supervision
mechanism, laws and regulations, as well as
education should be provided before the launch of
the board or it will only become a highly
speculative market," he said.
Wen, making
his address one day after the government said
defense spending would jump 17.6% to 417.8 billion
yuan this year, said a strong military is central
to China's modernization.
"We must balance
economic development and national defense
development to make China prosperous and the armed
forces strong as we carry out modernization ...
Our aim is to enable the army to fully carry out
its historic mission in the new stage in the new
century," Wen said.
Improving the military
would "enhance its ability to respond to security
threats and accomplish a diverse array of military
tasks, staunchly protect China's sovereignty,
security and territorial integrity".
The
Chinese premier said the Summer Olympics in
Beijing, which open on August 8, will be vital for
the country's economic and social development. The
government has invested tens of billions of yuan
in preparation for the Games, seeing the event as
a source of huge national pride.
"All sons
and daughters of the Chinese nation are looking
forward to the Olympics, which will be of great
importance in promoting China's economic and
social development and increasing friendship and
cooperation between Chinese people and the peoples
of other countries," Wen told the 2,970 delegates.
Wen also referred to government plans to
reform its Cabinet system. The changes will
"mainly center on changing the way the government
functions, appropriately dividing responsibilities
among departments that exercise macro-economic
regulation, adjusting and improving bodies in
charge of management, and improving departments
responsible for public administration and public
services", he said.
Media reports have
said some central government bodies will be
scraped or merged into a few mega-ministries
covering energy, transportation and the
environment. Wen said detailed plans on the
reforms will be submitted to the NPC for approval.
The legislative session ends March 18.
John Ng is a freelance
journalist based in Hong Kong. Olivia
Chung is a senior Asia Times Online
reporter.
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