A ‘Crisis Alert’ Conference of Party-Wide Significance*
This is an article from Southern Weekend, thanks to David Kelly for the translation:
The Central Conference held on June 13 proved once again that “stability” has become the main politics, that it is the basic starting point for us to grasp all current policy trends.
This meeting is equivalent functionally to the previous year’s economic work in the wrap-up session, but compared to a year ago, it’s a little earlier. I believe that is due to the earthquake, the Olympic domestic and international economic and financial situation and the latest changes, forcing the centre to bring things forward, which means that, having introduced the “State Department regulations on reconstruction after the Wenchuan earthquake” and the successful risk abatement at theTangshanyan quake lake, the focus of the Centre’s work returned to the macro global issues.
More importantly, this meeting is ranked higher than any session of a year ago, even higher than that of the Central Economic Work Conference. Unlike in previous years when economic work was summed up at the level of the State Council or the Politburo, this meeting was not only attended by the Central Politburo Standing Committee but in addition all central ministries and provinces, autonomous regions, leaders of some national enterprise, large military units and armed police forces all too part. An economic conference at the highest party level shows in itself that how concerned the Centre is about the new situation in the economic field, and needs to carry out party-wide mobilisation.
The notice of the opening session stressed the significance of this meeting: “It is held in context of many new complicated factors in the international and domestic situation, and of many new challenge facing the party and the state.” The meeting considered that at present, “achieving this year’s economic and social development targets have entered a key time,” and that “this year’s economic and social development faces a most complex situation and uncertain factors have increased.”
Expressions like “severe challenges,” “critical period” and “quite complex,” etc., show that judgment on the current situation is not optimistic, and bringing the meeting forward proves that, given the new “grim situation,” some established principles and policies require urgent adjustment.
On this level, in addition to unifying thinking and adjusting policies, this is more a “crisis alert” meeting of party-wide significance. So, what is meant by “new complic ated factors”? In addition to the high domestic inflation, the Olympics and post-disaster reconstruction, the international “new challenges” must refer to “ultra-high oil prices” and the “Vietnamese financial crisis,” etc.; the subprime loan crisis cannot be a “new challenge.” Regarding threats to “stability,” domestic risks are still controllable, it is international risks that are non-controllable, the purpose of the meeting, is to use controllable domestic resources to fend off international non-controllable risks. The policy of assuring growth has been significantly strengthened.
This meeting makes fundamental adjustments to the arrangements established by the 2008 Central Economic Work Conference and the State Council executive meeting for the First Quarter in the following three areas:
The emphasis on economic growth will be strengthened, on the basis of “anti-inflation,” policy efforts to “guarantee growth” will be significantly strengthened; “double defence” may become “one defence and one guarantee.”
In support of this point is that in the centre’s setting the tone of the current economic situation, there is no expression of the “three excesses” as in the past. They have been replaced by “economic and social development is facing a very complicated situation and uncertain factors have increased.” Clearly, what the Centre is worried about is no longer overheating, but whether “factors of uncertainty” including inflation, foreign demand, will depress the economy excessively.
This corresponds with the central macro-policies on the overall arrangements, wording about tightening like “control investment growth rate, control monetary and credit” has been cancelled, , but stressed that the policy of “predictability, targeting and flexibility.”
Fiscal policy from “stable” to “positive”
The second major adjustment, similar to 1998 may be an important change: We believe that financial policy will gradually shifted from “prudent” to “positive” core.
This entire meeting never mentioned monetary policy as part of macro policy, but raised it as follows in regulation and control policy as a general principle: “increase the prudent financial policy for restructuring, protection of people’s livelihood, support for post-earthquake reconstruction, completing all the tasks of economic and social devel opment.” We would argue that whether it’s the fight against inflation, strengthening social security, or improving people’s livelihood and solving the problems they are most concerned about, the most direct and practical interests, the Central will lean more on financial strength to pay for stability with proactive fiscal policy.
Unlike in1998, when special treasury bonds were dedicated to infrastructure building, the content of proactive fiscal policy this year, will be more reflected in the form of subsidies to bear the social costs of inflation, including high oil prices and subsidies, agricultural subsidies, social security, industrial restructuring, and secondary income distribution. It is worth noting that this meeting never mentioned monetary policy. There are two possible explanations, first, neither appreciation nor monetary tightening, are effective in controlling inflation, monetary policy has been excluded from the core policy; secondly, the Centre has reached no unified conclusion on whether to continue “tightening” monetary policy, so it has avoided the issue. We believe that the former is the more likely, although this does not mean that monetary policy will not continue tightening.
Anti-inflation: comprehensive price control in the short-term
The third major adjustment that we need to focus on the interpretation, the Centre’s unprecedented attention to the inflation issue, and possible means to be adopted.
During the meeting, “anti-inflation” was raised as the primary task of follow-up work; in overall terms, “anti-inflation” is the core content of “ensuring overall social stability” in the economic dimension, especially in view of the current chaotic situation in Vietnam, the direct factor is high inflation triggering outflows of foreign capital, and then threatening financial security, and forcing the Government to lower economic growth; while in terms of the root cause, the source is still in grain prices and oil prices. The Central Conference discussed inflation, was also focus “major commodity” prices typified by agricultural products.
Although the content of the meeting made no straightforward, “the prices”, but stressed that the “comprehensive use of economic, legal and necessary administrative means.”
Well, how wide can “administrative prices” be?
It can be affirmed that the scope of controlled price commodities will take in enterprises producing “basic life necessities.”
Two aspects are difficult to answer: first, after price limitations on “basic life necessities,” who is going to produce the expanded supplies? Second, administrative price controls distort the entire market system, should not the long-distorted refined oil and natural gas prices be increased?
We note that while the Central meeting is “doing everything possible to prevent general price levels rising too fast,” it once again stressed the importance of agriculture and investment. The meeting called for “strengthening production of grains, edible vegetable oil, meat and other basic necessities and other scarce commodity, and improving the reserve system to ensure the effective supply of important products and of materials.”
“To grasp agricultural production properly, it is necessary to implement the various policies for supporting agriculture and strengthen investment in it.” This leads to a question, the only way to limit prices on the one hand while expanding supply on the other is to intensify financial subsidies for agricultural production. But the problem is that the factors involved in agricultural production are very broad; if prices of other relevant aspects are not limited, rises in costs of agriculture will be rigid. Will financial subsidies be able to sustain producers of agricultural products and maintain enough drive to produce?
If prices in related aspects are restricted, the area under pressure will be unprecedented.
It is said that the NDRC recently convened an internal meeting of Division and Section heads, clarifying that the focus of control in the second half of the year will shift to PPI (producer price index), and mainly take three forms: strengthening control of factory prices of industrial products; further restricting export of major industrial fuels; and strengthening oversight and control of investments in fixed assets.
Of these, the prices of main industrial products typified by steel and coal will be further controlled, and prices of the steel, cement and other key materials used in reconstruction of disaster regions are required to revert to levels prior to May 11. In addition, the price authorities of other provinces at the same time are required to sum up local realities, based on of relevant provision the price law, to take timely temporary price intervention measures, through limiting posted prices or profit margins, etc., to maintain price stability.
Relevant NDRC officials stated that further tariff-based restrictions on export of related products were not ruled out, exports of coal, steel, oil etc., will face further controls.
The Government has given up rescuing the market, and is turning towards institution building
The current stock market has entered a very sensitive period, investor sentiment after the drop shows continuing “instability”, but the mills have kept circulating hearsay and conjecture about a “rescue”.
In our judgment, however, according to the spirit of this meeting, administrative levels are incapable of “to save the market” in the short term. The index is likely to decline further to the “share market reform core value range” of 2200-2800,
The spirit that this Central meeting expressed regarding the stock market, from “to prevent big ups and downs” of late last year, through the “stable and healthy development” in the Government Work Report earlier this year, has now become “promote the healthy development of capital markets.”
This meeting removed “stable,” mention of “healthy” but once. This shows that the central government has clearly give up the any policy intent of a “rescue” in the near future.
In view of the central government’s giving up considering “rescue”, and against the backdrop of entering a “extraordinary period” in macroeconomic terms, accelerating institution building has become the sole “political task” of the Securities Regulatory Commission
Therefore, there will be greater progress in basic institution building in the latter half of the year.
The highlight of the next wave of reform should be the launch in late 2008 or early 2009 of trading mechanism, distribution system and more robust “sise of the non-lifting of the ban” system as the representative of the “reform of the system based on the second stage.”
After the market “breaks 3000″—once the central government gives up “rescue,” the only way to “stabilize” it temporarily —it will continue to decline, and will return to the “value centre of the share reform period, and start fluctuating and adjusting around this centre
Perhaps, to some extent, the bear market will be of even greater significance to China’s capital market, because it makes people understand the potential crisis more profoundly, and effectively and fundamentally begin to solve the problem, completely abandoning the fantasy of rescue (investors) and intervention (administrators).
(The authors are Chief Commentators, Bolan Financial)
*’ Wang Xiaobing, Li Hongtu and Liu Tianzhi, “Yici quandang yiyi de ‘weiji jingshi’ dahui” [A 'crisis alert' conference affecting the party nationally], Nanfang zhoumo, 19 June 2008 [王晓兵、李宏图 、刘天智： "一次全党意义的'危机警示'大会"， 南方周末，2008年6月 19日 (http://www.nanfangdaily.com.cn/epaper/nfzm/content/20080619/ArticelC18002FM.htm).].
 [Translator] Excessive growth of investment, excessive money supply, excessive foreign trade surplus. See Wang Biqiang, “Renda wenze zhengfu diaokong ‘san guo'” [National People's Congress wants government accountable for curbing the 'three excesses'], Jingji guancha wang, 3 September 2007 [王毕强： "人大问责政府调控'三过'"， 经济观察网，2007年9月 3日 (http://www.eeo.com.cn/Politics/beijing_news/2007/09/03/82253.html).].