CDT Money: To Ease, or Not to Ease?

Premier Wen Jiabao opened the annual meeting of the National People’s Congress on Monday by presenting a work report which revealed, among other targets, that the Chinese government planned GDP growth of 7.5% in 2012. The Wall Street Journal reports that the figure, the first time China has set its growth sights below 8% in the past eight years, signals that China intends to focus more on the quality rather than the speed of its economic expansion and indicates a willingness by Beijing to accept slower growth in exchange for a more balanced development profile.

Wen touched on a number of familiar points in the report, including strengthening China’s social service and security net, improving agricultural and consumer distribution networks, the need for price stability, promoting private investment and boosting consumption. From the report, translated and posted by The Wall Street Journal:

We will work hard to expand consumer demand. We will vigorously adjust income distribution, increase the incomes of low- and middle-income groups, and enhance people’s ability to consume. We will improve policies that encourage consumption. We will vigorously develop elderly care, domestic, property management, medical and healthcare services. We will encourage consumer spending on cultural activities, tourism, and fitness; and implement the system of paid vacations. We will actively develop new forms of consumption such as online shopping; support and guide the consumption of green goods such as environmentally friendly building materials, water-saving sanitation products, and energy-efficient vehicles; and expand consumer credit. We will improve the urban-rural logistics system and infrastructural facilities, such as roads and parking lots, strengthen supervision over product quality and safety, improve the consumption environment, and safeguard consumers’ legitimate rights and interests.

We will continue to improve the investment structure. We will maintain the steady growth of investment and use investment to promote consumption and vice versa. We will fully implement the State Council’s 36 new guidelines on encouraging and guiding nongovernmental investment and adopt specific operating rules for their implementation. We will strengthen the role of government investment in guiding adjustment of the economic structure, ensure funding for key projects that are under construction or expansion, and begin construction on major national projects in an orderly manner. We will tighten standards on market access and the screening and approval process relating to land, credit, energy conservation, environmental protection, safety, and quality; and strengthen supervision and inspections of major projects, particularly those undertaken by governments and state~owned firms, to improve the quality of and returns on such investments.

Xinhua News reported that slower but better growth will benefit the world economy in the long run, and several foreign observers spoke about the global importance of a Chinese economy with a more balanced direction:

Steve Roach, Yale professor a former president of Morgan Stanley Asia, said in a recent article that China is doing a “far better job” in managing its economy than most give it credit. It even offered some lessons in macro policy strategy that the rest of the world should heed.

He also said China has waged a very successful campaign in controlling its inflation, which “has long been the nation’s most destabilizing economic threat.”

“China has plenty of ammunition in its monetary policy arsenal,” while in contrast, central banks of the United States and European nations “are out traditional ammunition,” and “have been forced to rely on untested and dubious liquidity injections,” Roach said.

He added that China is cut from a very different cloth than the advanced economies of the West. Long focused on stability, Beijing is more than willing to accept short-term costs of a “growth sacrifice” to keep its development on track.

Reuters reports that the lower national growth target falls short of the 10.3 percent weighted average of the projections of China’s 31 provinces, a reminder that the sum of the parts exceeds the whole and growth is still the lifeblood of regional officials:

“Clearly they want to signal that they want to change the growth model. But to change the growth model, you need to do a lot more than lowering your growth target,” said Stephen Green, an economist at Standard Chartered Bank in Hong Kong.

“The system hasn’t changed. It’s still all about stronger growth, getting promoted on the back of growth,” he said.

So while most provincial leaders have trimmed targets to show support for the national leadership, the personal incentive to outperform keeps them well above Beijing’s mandated rate.

While China observers looked to policy announcements and other hints emerging from this week’s NPC sessions, a number of data releases at the back end of the week combined January and February numbers to help to clear up any distortions caused by the Lunar New Year holiday. The factory sector grew at an 11.4% clip, its slowest expansion since mid-2009, and the People’s Bank of China announced that new yuan loans totaled RMB 710.7 billion. While the figure represents a decline from January’s RMB 738 billion level, and fell short of a RMB 750 million estimate in a Bloomberg News survey of 26 economists, it exceeded a RMB 500 million estimate in the state-run China Securities Journal. The shortfall, about RMB 300 million less than in the same period last year, may fuel increased expectations of more RRR cuts in 2012 as the central government continues to “fine-tune” its economic levers.

Finally, Friday brought news that the consumer price index (CPI) rose at the slowest pace in 20 months, a bright spot in an otherwise dreary string of data and one which may have bolstered the case for a stimulus. But while some economists agreed that the inflation figure supported policy loosening, one analyst warned Reuters to expect a tight year for Chinese monetary policy as China attempts to avoid a hard landing.

Spotlight: Weekend Trade Data

China posted a rare and massive $31.5 billion trade deficit in February, its largest in at least a decade, with exports falling nearly 25 percent from January. Import growth of nearly 40% far outpaced exports, though Xinhua News reported that the vast and skewed deficit reflected the statistical challenges posed by the earlier-than-usual Lunar New Year Holiday. The Financial Times cited the Lunar New Year effect as well, pointing out that combining the January and February data paints a less grim picture. Still, the news was enough to snap a two-day gain when Hong Kong’s stock market opened on Monday morning.

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