MercoPress. South Atlantic News Agency

Chinese leaders concern with slower growth and inflation

Slowing of global demand hits Chinese economy

The People's Bank of China, (central bank) in a summary of its second-quarter policy meeting, pledged to keep a “consistent” monetary stance, the same word used on Friday by the top leadership of the ruling Communist Party to describe the planned thrust of economic policy for the rest of 2008.

China wants to eliminate excess liquidity and inflationary pressure while avoiding undue pain for its export sector, which is feeling the pinch of weakening global demand, tight credit and an appreciating currency. "Unfavourable factors in the international economy and serious natural disasters at home have added to uncertainty, but have not changed the fundamentals of China's economic development" said the central bank in a statement posted on its website. "We should let interest rate leverage play a reasonable role and steadily push forward interest rate reform". However independent economists said a pledge to use interest rates appropriately should not be taken as a signal that a tougher monetary policy was in the offing. For a start, the statement did not explicitly mention tightening monetary policy. The Chinese central bank, despite declaring in late 2007 that it was shifting to a tighter stance, has not raised benchmark rates since December. Since then, economic growth has slowed and inflation, though still uncomfortably high, has eased from a near 12-year peak in February. China's GDP grew 10.6% in the first quarter and 10.1% in the second, with 10.4% growth for the first half of 2008, while the Consumer Price Index reached 7.9% in the first half of 2008. A meeting of Chinese top officials earlier this month had focused on the Pearl River Delta and Yangtze River Delta, both export hubs facing job losses, especially in the textile sector, as well as on the northeast of the country, which suffered massive layoffs and bankruptcies in the 1990s, the official Xinhua news agency said. The meeting had concluded that China must steer a course between fast growth and inflation, while "not allowing this year's economic development to obscure next year's". The leaders had also decided to focus on domestic consumption while increasing economic openness, Xinhua said. Underlining official concern over speculative inflows, the central bank issued a second statement on Sunday in which it vowed to keep a tighter check on "abnormal" foreign currency flows, and to effectively prevent excess in short-term capital flows. It reiterated its long-standing policy of keeping the Yuan "basically stable" at a "balanced level". The Yuan has been allowed to appreciate by about 7% against the dollar in 2008, but its rate of climb slowed in the second quarter as concerns grew that rapid appreciation was attracting hot money while harming exporters. Tight credit meant to discourage overheated investment has added to the pain for private exporters and trading companies, who have been unable to access credit for cash flow and investments. The central bank called for financial institutions to lend more to small enterprises, and for increased competitiveness of the financial sector. A survey estimate among 17 Chinese and foreign institutes concluded that China's GDP is set to grow 10% and the CPI 6.1% during the third quarter, down 0.1 percentage points and 1.7 percentage points, respectively, from the second quarter. "The government's tight monetary policy is beginning to work to bring down inflation with the quickened pace of Yuan appreciation and a slowdown in money supply and GDP growth" said Lu Feng, professor at Beijing university. "The dramatic increase in demand since last year was driven by money supply growth" said Song Guoqing, another Beijing University economist. "However, statistics released in June showed a steady downward trend in money supply". "Besides, a large portion of the 'hot money' is deposited in banks to profit on interest and foreign exchange rate differentials. Plunging stocks have caused wealth losses. These are being translated into slower pace of fund circulation", added Professor Song. "Considering changes in the pace of fund circulation and money supply, the growth rate in overall demand is expected to continue slowing" concluded Song.