(China Daily)
Updated: 2008-01-31 11:08

The heavy snowstorms hitting China have caused huge financial losses. It has also affected the daily life and travel plans of a big portion of the country's population.

However, the damage is only temporary. The economy will quickly resume its normal track and pace once the weather changes.

In China, there has been overcapacity in many industrial sectors. Combined with the efforts from the governments at all levels, this overcapacity will help erase the negative influences posed by the natural disaster.

China's economic development has relied on urbanization and the boom in the property market after 2000. The two engines are not going to be changed by stock market fluctuations or snowstorms.

Figures from the National Bureau of Statistics (NBS) suggest that the business cycle index was 121.3 in December last year, while the ideal level should be 100. This hotter-than-normal status of the macro economy was maintained for several months last year.

The NBS estimates that China's GDP in 2007 will be 24.7 trillion yuan, 11.4 percent higher than 2006. This figure is much beyond the target of 8 percent. And it is the fifth year in a row that the Chinese economy has achieved double-digit growth.

Since July last year, China's exports have grown robustly, the foreign exchange reserve has kept on rising, new bank loans reached their annual ceiling months before year-end, and investment in fixed assets has stopped declining.

All these signs back one conclusion: the Chinese economy is overheating.

Although the official rise of the consumer price index (CPI) for 2007 was only 4.8 percent, the system for calculating the CPI is defective, the rise was not mirroring the true rise in prices for essential goods. If the authorities decide to loosen the monetary policy according to the 4.8 percent growth, it would be a misunderstanding of economic performance.

Despite the authorities' efforts to control price rises through administrative means, the prices might rise again this year, both on the international market and on the domestic market due a shortage of certain commodities caused by the snowstorms.

Therefore, if the Chinese central bank followed the US Federal Reserve and loosened its monetary policy, it would not only hinder efforts to prevent the economy from overheating, but also add more bubbles to the stock and property markets. It might even push the consumer price index even higher, or cause other unforeseeable damage.

The authorities should firmly stick to its tight monetary policy as it is essential to maintain the economic soundness of China under the prevailing conditions.

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