China Fiscal and Monetary Policy

China Fiscal and Monetary Policy The politburo of China's ruling Communist Party just concluded the Central
Meeting for Economic Work to set policy stance for 2011. Official policy stance now has been changed to "proactive fiscal policy and prudent monetary policy" from the previous "proactive fiscal policy and relatively loose money policy" which was started in 4Q08 when China was hit by the global financial crisis. The simple interpretation is that there is no change to fiscal policy stance, but monetary policy stance will tightened. What's interesting is the "no change" to fiscal policy stance which will continue to be "proactive". This is fully in line with our views since mid-year ( "Beijing's new thinking: loose fiscal, tight monetary"), and was recently highlighted in one of our reports ("Policies amid rising inflation and non-overheated growth"). Simply put, we believe China's growth is not overheated, inflation is not the consequence of growth overheating, and the government has no intention to slow growth to curb inflation. Proactive fiscal policies will be used to offset tighter monetary policies to maintain growth at around 9.0%. The best example in this year is ramped up spending on public housing after the government started its property tightening measures (partially by raising down payment ratio and mortgage rates). Fiscal deficit could remain above 2% of GDP in 2011 (up from almost zero level in pre-crisis time); while loan growth and broad money growth will be lowered to 14-15%, the level slightly below pre-crisis average.(5) With slowed economic growth, China's consumer price index growth reduced from 6.5% in July to 6.2% in August. In addition, as the risk of a second recession surfaces in the United States and Europe, and global inflation shows signs of a slowdown, economists expect the central bank to relax its monetary policy to address the worsening shortages of capital faced by small and medium enterprises. However, since China's inflation is still trending upwards, house prices remain high and taking out private loans is becoming a common practice. A relaxed monetary policy could make this situation uncontrollable. Under the circumstances, the future direction of the government's monetary policy has become a focus of public concern. China's economy has now reached a turning point. While the country's purchasing manager's index, a gauge of industrial activity, rose slightly to 50.9 in August from 50.7 in July, the export order index fell by more than 2%, signaling that the country's exports may slow down. Moreover, increasing wage and production costs, a strong renminbi, slowing growth in the US and European economies and weak global demand have posed stiff challenges to exporters.
On the other hand, although inflation has peaked and started to fall, the general public has not seen a drop in commodity prices. Economists recently publicly questioned the accuracy of official data on commodity prices. Meanwhile, the International Monetary Fund also publicly called on China to continue its tightening of its monetary policy to cope with inflationary pressures. Soaring house prices are China's other concern. Although after the government introduced measures to cool down the housing market, house prices in August in ten first-tier cities experienced their first drop since September 2010, the drop was less than 1%, while prices in second- and third-tier cities continued to surge. Yet the negative side effects of the tightening monetary policy are growing. Chinese economic experts estimate that up to 70% of small and medium enterprises are finding it tough to survive. Among them, only 15% can obtain bank loans, while more than 80% must turn to private loans with annual interest rates of between 60-120%. According to a government report, about 3 trillion yuan (US$469 billion) of money from banks has flowed into the private loan market, giving rise to fears of a Chinese subprime mortgage crisis. This has also made the central bank hesitant to ease monetary policy.(7) Moreover, the 10.7 trillion yuan (US$1.67 trillion) of debt held by local governments also creates a further risk of a financial crisis.
Snapshot Of Chinese Economy Statistics $5.93 trillion (nominal: 2nd; 2010) Exports GDP
$10.12 trillion (PPP: 2nd; 2010)
Export goods
GDP growth
10.40% (major economies: 2nd; 2010) $4,382 (nominal: 91th; 2010)
Main export partners Imports Import goods
GDP per capita
$7,544 (PPP: 94th; 2010)
GDP by sector Inflation (CPI) Gini index
industry (46.8%), services (43.6%), agriculture (9.6%) (2010 est.) 4.9% (January 2011) 41.5
Main import partners FDI stock Gross external debt
External US$1.581 trillion (2010) electrical and other machinery, including data processing equipment, apparel, textiles, iron and steel, optical and medical equipment US 20.03%, Hong Kong 12.03%, Japan 8.32%, South Korea 4.55%, Germany 4.27% (2009) US$1.327 trillion (2010) electrical and other machinery, oil and mineral fuels, optical and medical equipment, metal ores, plastics, organic chemicals Japan 12.27%, Hong Kong 10.06%, South Korea 9.04%, US 7.66%, Taiwan 6.84%, Germany 5.54% (2009) $100 billion (2010) $406.6 billion (22nd; 2010)
Labour force Labour force by occupation Unemployment
780 million (1st; 2010) agriculture (39.5%), industry (27.2%), services (33.2%) (2008) 4.2% (July 2010)[3] mining and ore processing, iron, steel, aluminum, and other metals, coal; machine building; armaments; textiles and apparel; petroleum; cement; chemicals; fertilizers; consumer products, including footwear, toys, and electronics; food processing; transportation equipment, including automobiles, rail cars and locomotives, ships, and aircraft; telecommunications equipment, commercial space launch vehicles, satellites $3.20 trillion (1st; 2011)
Public debt Revenues Expenses
Public finances 17.5% of GDP (112th; 2010) $1.149 trillion (2010) $1.27 trillion (2010)
Main industries
Economic aid
recipient: $1.12 per capita (2008
Foreign reserves
Source http://en.wikipedia.org/wiki/Economy_of_the_People%27s_Republic_of_China

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China Fiscal and Monetary Policy The politburo of China's ruling Communist Party just concluded the Central

$10.12 trillion (PPP: 2nd; 2010)

10.40% (major economies: 2nd; 2010) $4,382 (nominal: 91th; 2010)

Main export partners Imports Import goods

GDP per capita

$7,544 (PPP: 94th; 2010)

GDP by sector Inflation (CPI) Gini index

Main import partners FDI stock Gross external debt

Labour force Labour force by occupation Unemployment

Public debt Revenues Expenses

recipient: $1.12 per capita (2008

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