China Aims to Balance Growth and Inflation

China’s top leadership agreed on the gen

eral direction of the nation’s economic policy for 2012 at the annual three-day Central Economic Work Conference, which concluded in Beijing on Dec 14, 2011. They pledged to take a slew of measures to “make progress while maintaining stability” amid the“extremely grim and complicated” global outlook. The current “proactive fiscal policy and prudent monetary policy” will be maintained.

Stability as top priority

Stability is still the key word at China’s annual Central Economic Work Conference.

According to a statement issued after the conference, “making progress while maintaining stability” will be the main theme of 2012. “Stability means to maintain basically steady macroeconomic policy, relatively fast economic growth, stable consumer prices and social stability,” the statement said.

Many analysts believe it is a sensible choice to maintain stable growth given the international and domestic situations.

Extremely grim global economic outlook in 2012

The statement described the current global economy as “extremely grim and complicated” as the eurozone sovereign debt crisis has worsened and economic recovery in the US remains weak.

With the world economy slowing and international financial markets in chaos, the world’s economic recovery is expected to remain unstable and uncertain, the statement said.

Under the economic globalization, every country suffers and has to pay the cost. Quantitative easing policies, which are likely to be put into place in the United States and Europe to help solve the debt crises there, may create additional inflationary pressure on China, according to Wang Tongsan, head of the Institute of Quantitative and Technical Economics under the Chinese Academy of Social Sciences (CASS).

Faltering external demand will continue to weigh on China’s foreign trade and slow its export growth in 2012, he added.

Strives to shore up growth whiles reigning in inflation

While noting the global economic malaise, Beijing conceded that China is in a tight spot itself, squeezed by both inflation and a slackening pace of economic activity.

Chinese policy makers strive to shore up growth while avoiding reawakening the inflation dragon, analysts said.

“China must stabilize economic growth to prevent a sharp plunge, which might dampen employment and cause social problems,” said Zhu Baoliang, deputy director of the Economic Forecast Department of the State Information Center, a government think tank.

China’s economic growth has been slowing all year in 2011. Its GDP growth slowed to 9.1 percent in the third quarter from 9.5 percent in the second quarter and 9.7 percent in the first quarter.

Growth of exports, one of the major engines used to power China’s expansion, also slowed, to 13.8 percent in November from 37.7 percent in January in 2011.

“The global economic slump and sluggish external demand left little room for sharp increases in China’s export volume. In the meantime, most Chinese exports are manufactured goods that face full competition and exporters tend to wage ‘price wars’when the world economy is weak, thus squeezing China’s exports,” said Zhang Yansheng, a researcher of the Institute for International Economics Research of the National Development and Reform Commission, China’s top economic planner.

As China says it will continue to maintain a prudent monetary policy and a proactive fiscal policy in the near future, economists expect economic growth to fall below 9% and export growth to slow to around 10% in 2012.

China’s 4 trillion yuan fiscal stimulus package gives the country a quick rebound from the global economic crisis, causes excess liquidity and puts a large debt burden on local governments.

Growth of the consumer price index (CPI), a main gauge of inflation, eased to 4.2 percent in November, 2011 from the year’s peak of 6.5 percent in July.

However, even with the sharp fall in November, the country’s CPI rose 5.5 percent year-on-year during the January-November period, well above the government’s full-year inflation control target of 4 percent.

Although the CPI rise has slowed, there are still factors that may push up prices, including price increases triggered by higher costs and uncertainties of imported inflation, said Wang Yiming, deputy head of the Academy of Macroeconomic Research under the country’s top economic planner, the National Development and Reform Commission.

Fine-tunes policies

China will maintain “prudent”monetary policies and “proactive” fiscal policies, despite the easing of inflation. The yuan will be kept “basically stable”; interest rate and exchange rate reforms will continue; measures aimed at calming the property market will be kept; exports will be held steady whilst imports boosted to balance trade.

Economists said the statements suggested Beijing preferred to only finetune economic policies, rather than swing into an outright monetary easing mode to shore up growth, which is expected by many analysts to slip below 9 percent in 2012 for the first time in over a decade.

“This year it’s a lot less drama,”said Tim Condon, an economist at ING Bank in Singapore. “The statements are much less thematic than 2010 when they moved from a moderately loose to a prudent stance.”

But China made clear that the policies will be flexible, which means the government will react when slowdown trends are clear.

“We will fine-tune monetary poli- cy in an appropriate and timely manner according to the economic situation, and will use various monetary tools to keep a reasonable growth in money and credit,” the statement said.

Economists say policy fine-tuning is already under way. Data showed Chinese banks made 562 billion yuan of new loans in November, 2011, a shade more than forecast as Beijing gently eases tight credit conditions.

China’s central bank announced on Nov 30, 2011 it was cutting the reserve requirement ratio for its banks for the first time in nearly three years to ease credit strains and shore up business activity, and market watchers expect further reductions in 2012.

Bolder steps such as cutting interest rates, however, appear premature for now. While that may boost investment, China’s leaders fear it could also revive inflationary pressures, especially in the housing market, economists say.

Keeps yuan value stable

The meeting noted that China aims to keep the yuan’s value “basically stable” whilst pushing ahead with reforms aimed at liberalizing the country’s interest exchange rates.

“However, the government probably will have to take more positive measures to shore up economic growth in the first quarter, including slowing the appreciation of the yuan,” Li Wei, economist at Standard Chartered Bank(China) Ltd, told China Daily.

“But China doesn’t want to see large-scale yuan depreciation either, unless unemployment becomes a big issue,” Li said.

“Through the whole year of 2012, there will be still a 2 percent appreciation of the yuan against the dollar.”

A new exchange-rate regime could pave the way for two-way currency fluctuations, improve the reference to a basket of currencies and slow the accumulation of foreign reserves.

Drives housing prices back to“reasonable level”

Beijing promised to keep a tight policy leash on property at the conference.

To ensure property prices “return to a reasonable level”, China said it will uphold measures aimed at cooling housing prices, which are still near record highs, and increase the supply of homes.

It will also push forward the trials of property tax reform. Property-tax trials were carried out in Shanghai and Chongqing at the beginning of 2011 as part of its efforts to curb skyrocketing home prices and contain asset bubbles.

Since April 2010, China has imposed a raft of measures aiming to calm property prices. They include higher down payments, limits on the number of houses that people can own, the introduction of a property tax in some cities, and the construction of lowincome housing.

The government has vowed to build 36 million units from 2011 to 2015 in an effort to give more midand low-income households access to housing and stabilize runaway property prices, with 10 million units planned for both 2011 and 2012.

China’s housing authorities said on Nov. 10, 2011 that the country has already met this year’s goal of starting the construction of 10 million units.

“The construction of affordable homes will help curb excessive price rises and fuel urbanization, which will in turn unleash consumption and investment potential and push the development of related industries,” said Vice Premier Li Keqiang.

In October 2011, 34 cities in a statistical pool of 70 major cities saw declines in new home prices from September, compared with 17 in September, data with the National Bureau of Statistics showed.

Cuts tax to aid economic growth

More tax reforms are on the 2012 agenda as part of China’s “positive fiscal policies” intended to restructure and balance the economy.

An important part of the plan involves five tax reforms: a pilot program for the value-added tax; one to the property tax; adjusting the scope and structure of the consumption tax; expanding resource tax reform and studying the feasibility of an environmental tax.

Value-added tax reform, or replacing the turnover tax with a value-added tax, will see its first pilot program in Shanghai starting on Jan 1, 2012.

“This move would resolve the issue of duplicate taxes and lower the tax burden, especially for the service sector,”Liu Shangxi, deputy director of the finance ministry’s Research Institute for Fiscal Science, told China Daily.

Liu said it hasn’t been decided whether the property tax pilot program in Shanghai and Chongqing would be extended to more areas or nationwide, but the tax would continue to serve as a means of regulating the housing market rather than a new source of fiscal revenue.

“As for the consumption tax, the key of the reform lies in changing the scope of assessment. For example, to redefine ‘luxury goods’ by moving some cosmetics products off the list,” Liu said.

China also shifted the basis of the oil and natural gas tax to value nationwide from volume, which raised the tax rate by about 10 times.

“There will be more resources, such as coal, to be taxed by value of production because easing inflation gives more room for tax reform,” said Liu.

Environmental taxes, such as a carbon tax, are still in the research phase and will not necessarily be implemented in the next year, but such taxes will eventually replace some administrative fees, Liu added.

These tax cuts will spur consumption, without disastrous consequences triggered by a record 17.5 trillion yuan($2.8 trillion) of lending in 2009 and 2010 that funded infrastructure projects and real-estate speculation.

Meng Chun, a senior researcher with the State Council’s Development and Research Center, said in a research note that more such tax preferences should be directed toward smaller businesses to help them move up the value chain and withstand the global downturn.

Tax burdens on the agricultural and processing sectors should also be eased to stabilize food prices and ease inflationary pressure, Meng said.

Fiscal revenue reached 9.73 trillion yuan by the end of November 2011, up 26.8 percent year-on-year.

Boosts domestic demand

Policymakers stressed the importance of boosting domestic demand to accelerate the transformation of the growth model toward a more consumption-driven one against the backdrop of weak external demand.

There will be more efforts to boost domestic consumption. China will continue to increase the earnings of lowincome families and build a stronger middle-class. At the same time, it will deepen education and medical reforms to keep more spending money in people’s pockets.

“If the country can spur domestic demand, especially domestic consumption, it will get inexhaustible growth momentum,” said Yao Jingyuan, a special researcher with the Councillor’s Office of the State Council, or China’s Cabinet.

The Chinese leadership reiterated their commitment to boost imports in order to balance trade.

The Ministry of Finance said that from 2012 China will reduce import taxes for 730 categories of goods including energy resources, parts and components of strategic emerging industries and daily necessities that could promote consumption.

The move is likely to find favour with European and US exporters, who have long complained about the trade surplus China has been running.