1、 1 Navigating Monetary Policy The Central Economic Work Conference Sets the Tone for 2010 WITH the accomplishment of last year s eight-percent economic growth under its belt, the Chinese government proceeded to set the tone for China s economy in 2010. The Central Economic Work Conference held on De
2、cember 5-7, 2009 saw some minor policy changes but much justification for staying the course on major monetary decisions. Staying the Course, Trimming the Sails Trends in China s financial and monetary policies have been of great concern to insiders in every industrial sector long before this confer
3、ence opened its doors. It has been predicted that sooner or later China would discontinue its loose money policy under increasing criticism of asset price bubbles, fear of which is felt by economic policy wonks and the general public alike. Chinas macro-economic policies have long been entangled in
4、the following dilemma: a decoupled currency lets a society work with its own momentum but generates bubbles; a tight one balances growth but 2 tends to strangle it as well. So what is at issue is when and how the central government should exercise the exit strategy they are under pressure to announc
5、e. The right timing won t be coming around in 2010, the Central Economic Work Conference has decided. Its final prescription is to maintain the continuity and stability of the current macro-economic policy, including a proactive financial policy and an appropriately loose monetary policy. The policy
6、 continuation decision is based on assessment and analysis of the global and domestic economic situations, noting that the latters own “recovery lacks a solid foundation.” Domestically, it is getting increasingly difficult to keep up stable and fast growth while making necessary adjustments to the m
7、ode of economic development. The internal driving forces for economic recovery are still shaky: the countrys problematic economic structure, a weak agricultural foundation, a grim employment market, and domestic consumption up ?C but inadequate for the job. Internationally, the impact of the global
8、financial crisis is still unfolding into significant and successive challenges. Prior to the conference, on November 16, a report released by the National Information Center stated that the threat of inflation was not significant, and that the general level of market prices 3 would not rise by large
9、 margins. It predicted that the inflation rate in 2010 will be around 2.5 percent. The report went on to suggest that keeping an appropriately loose monetary policy will continue to be a necessity in 2010, since changing course would greatly dampen consumer confidence, leading to economic decline or
10、 even a long-term recession. In 2009, the annual issuance of loans by the central government amounted to nearly RMB 10 trillion and its total investment was RMB 908 billion. In effect, the structural adjustment reduced the total burden of taxation on enterprises and general consumers by RMB 550 bill
11、ion. In the same year local governments issued loans totaling RMB 200 billion and will continue to obtain issuance rights in 2010, according to the financial budget report submitted to the State Council by the National Development and Reform Commission. The central treasury will continue with its “h
12、igh -deficit budget” practice, with the deficit expected to break the 2009 record of RMB 950 billion. Meanwhile, major credit organizations across the country have predicted an annual issuance of RMB 6-8 trillion in loans for 2010. Some minor policy changes promise to stir a few things up. For the f
13、inancial policy, the conference emphasized that the flow of money should be increased in areas affecting peoples 4 livelihoods. At the same time, investment in other fields should be kept within an “appropriate” growth rate and concentrate on “unfinished projects,” meaning “new projects should be st
14、rictly curbed.” It recommended that the monetary policy should be sensitively linked to changes in the domestic and international economic situation and, accordingly, “take masterly control of the speed of growth in credit.” These policy guidelines correspond with the judgment of Cao Yuanzheng, chie
15、f economist with Bank of China International Holdings Limited. He anticipates, “ The macro-economic policy in 2010 will make a turn, but not a sharp one. The financial policy must remain proactive, but the monetary policy should veer towards neutrality if structural adjustment is to be served.” The
16、central decision-making team was hesitant about discontinuing its economic stimulus policies, but the executive meeting of the State Council in mid-December made a cautious move toward it. Beginning with speculation in the housing market, they restored the period after which a buyer can sell his/her
17、 property without paying the business tax to five years after the purchase date; just one year ago the business tax exemption period for housing transfer was shortened to two years in order to stimulate the construction sector. Measures passed also reduced preferential 5 treatment in the market for
18、motor vehicles of 1.6-liter displacement and below; the tax break of 5 percent has been raised to 7.5 percent. Togetherness Stimulates Demand Expanding domestic demand remains a major policy for 2010 and the rural market is still considered a key to the expansion of that demand, particularly the mig
19、ration of widely dispersed rural residents to denser concentrations in urban enclaves. Looking back, the contribution of consumption to China s achievement of an 8-percent economic growth was surprisingly low, considering the total retail sales growth of social consumer goods exceeded 15 percent in
20、2009. According to figures released by the National Bureau of Statistics, of the 7.7-percent growth in the first three quarters of 2009, investment made up 7.3 percent, consumption made up 4 percent, and exports made up a negative 3.6 percent. The 2009 stimulus policy that encouraged rural consumpti
21、on of household electric appliances will continue into 2010, supported by official statistics that indicate more than 30 million home appliances were sold in the countryside last year, worth nearly RMB 60 billion in sales. However, the Central Economic Work Conference 6 is emphasizing acceleration o
22、f urbanization as a solution to increasing domestic consumer demand. What they are pushing for now is a “ greater consciousness and greater initiatives ” to carry out domestic demand expansion policies, in particular the expansion of consumer demand within the framework of improving peoples liveliho
23、ods. Relaxing control of urban residential registration in small and medium-sized cities will allow an increasing number of long-staying migrant workers to, step by step, change their residential status from rural to urban. “This move will help narrow the urban -rural gap, increase villagers incomes
24、, stimulate consump tion and increase national economic stamina,” comments Zhu Baoliang, chief economist with the Economic Prediction Department of the National Information Center. However, rising housing prices is one major obstacle to realizing the potential this would have to boost demand. In 200
25、9, housing prices increased by more than 20 percent over 2008 figures. According to the 2010 Economic Blue Book released by the Chinese Academy of Social Sciences, Chinas housing price/income ratio is severely disproportionate, leaving 85 percent of Chinese families unable to afford a purchase. The
26、Blue Book also points out that the volume of sales and the pricing of units are both dependent on the governments determination to stabilize 7 housing prices through reform and regulatory measures. No surprise that, given the economic stakes, the conference made the real estate industry a particular
27、 focus of discussion. It proposed support for people to improve their living conditions, an increase in the supply of ordinary commodity housing, and accelerated construction of low-rent and other guaranteed housing. At its executive meeting following the conference, the State Council made it clear
28、that land supply would be increased for projects featuring moderate and low-priced housing and medium to small units of public housing for rent. Such policies would dampen a too-rapid increase in housing prices. Low levels of social security are also blamed for sluggish demand and consumption. The c
29、onference called for intensification of aid to low-income people, elevation of the urban and rural living allowance, an increase in pensions for enterprise retirees, and enhancement of preferential treatment for special disadvantaged groups as specified in the countrys welfare programs. In 2009, the
30、 central treasury earmarked RMB 716.14 billion to strengthen agriculture, increase farmers incomes and improve rural development, while expenditures on education, public health and hygiene, social security, employment, guaranteed housing, cultural undertakings and other social infrastructure directl
31、y 8 related to peoples living standards amounted to RMB 728.463 billion. Financial priorities will maintain a focus on these areas in 2010. However, some scholars have different ideas as to how to expand domestic demand. Yu Yihong, a professor from the Department of Industrial Economics of Fudan Uni
32、versity, holds that “ the most direct and effective method is to raise the threshold of individual income tax.” He believes that partial industrial or consumer preferential policies are not the solution. “Using taxpayers money to subsidize specific groups or trades will distort resource distribution
33、 and lead to an imbalance, stoking a negative reaction against any structural adjustment.” Low-Carbon Economy Straight Ahead There are deeper forces at work than those that demand mere tinkering with policy. Yao Jingyuan, chief economist with the National Bureau of Statistics, says the Central Econo
34、mic Work Conference has sent the signal that “If the most important task for 2009 was to ensure economic growth, then the key words for 2010 are structural adjustment and the transformation of Chinas economic development mode.” The goal of transformation is to 9 promote independent innovation. To ac
35、celerate this change a systemic re alignment is required that will raise the capacity for such innovation while balancing other tried-and-true forms of economic growth. Liu Shangxi, deputy director of the Financial Science Research Institute of the Financial Ministry, explained the meaning of “ stru
36、ctural adjustment” in an interview with journalists. “ It involves not only industrial structure, but also other structures like the urban-rural interrelationship, regional configurations and income distribution systems, as well as what we think of as the economic structure.” The 2010 Economic Blue
37、Book released by the Chinese Academy of Social Sciences points out that China faces the formidable task of refining an economy and changing a mode of economic development that is taxed by “excess prod uction capacity and irrational industrial structures.” In addition to planning structural adjustmen
38、ts that will narrow regional and urban-rural disparities, the conference also proposed to strengthen credit policies in support of key projects and weaker links in socio-economic development overlooked by other initiatives.Obvious sectors are employment, new industries of strategic significance, and
39、 industrial transfer projects. Strict 10 control on loans to high-energy consuming, heavy-polluting and over-capacity industries was a policy plank, as was assistance to energy-saving and emission-reducing projects. According to the conference report, a low-carbon economy will be bootstrapped to get
40、 control of greenhouse gas emissions. By the time the conference was underway, the retail price of gasoline had shot to record highs. According to the current pricing mechanism, the retail rate is subject to adjustments in line with international petroleum prices. The current price increases for ele
41、ctricity and water resources around the country are also believed to signal an overall implementation of resource pricing reform and the central authorities determination to use economic leverage to alter the mode of development. Central Economic Work Conference Themes for the First Decade of the 21st Century 2010: Stabilize growth, adjust structure, and prevent inflation 2009: Ensure growth, expand domestic demand, adjust structure, and promote healthy and quick development 2008: Control aggregate economic volume, stabilize pricing, adjust structure, and promote balance
