By Xia Bin, Research Institute of Finance of the DRC

Research Report No 130, 2010

I. Reasons for Swift Changes of Economic Performance

During the end of last year and the beginning of 2010, under the pressure of excess money supply at home, the real estate prices surged up, the systematic local debt risks became conspicuous, quality of bank assets was pregnant with grim risks and inflation expectations went up considerably. Under such circumstances, it is imminent to tighten the control over the systematic risks of the macro-economy. To this end, the government has come up with a series of policies since the beginning of the year. Up to now, effects resulting from the macro-control measures have been looming up.

GDP grew by 11.7% in the first quarter and by 10.3% in the second, down by over one percentage points. At the same time, according to predictions by many institutions, GDP growth will continue to decline during the third and fourth quarters and is likely to go down to less than 9% in the fourth quarter. Some other economic indicators are also experiencing a downturn, especially some leading economic indicators.

Why does economic growth slow down on a quarterly basis, presenting a growth-decline trend ? It is attributable to the growth base of last year and is mainly as a result of the active adjustment through macro-control policies during this year. Three major policy variables have been the main reason for the economic performance to become stable within a short period of time, namely the real estate policy, the rectification of local financing platforms and the policy aimed at limiting overcapacity and energy consumption. To facilitate the implementation of the three major policies, the central bank has exercised a firm control over the credit scale of 7.5 trillion yuan of funds. In terms of operability, a factor that cannot be neglected is that the new loan management model of "Three Measures and One Guidance" enacted by China Banking Regulatory Commission has evidently reduced the derived factor, thus playing the role as does the central bank of restraining the money supply from increasing at a fast pace.

However, in terms of future economic performance, despite the quarterly slowdown and the growth followed by decline trend, the prediction made by a large number of Chinese and foreign institutions over the previous period of time is that the economic growth for the whole year will still be able to remain between 9%～10% (10.5% predicted by IMF and 11.1% by OECD). CPI will rise to its maximum in the third quarter, with the yearly rise ranging from 3.1～3.4, thus a failure of control will not appear (Recently, some institutions, such as Goldman Sachs Group, are gradually bringing down their CPI predictive indicators for the whole year). It should be mentioned that the present development trend is a positive result of the macro-control policy as well as a prediction made early through the market. It is normal and reasonable, reflecting the change of the mode of economic development and the intention of the structural adjustment. In terms of the trend, next year the economic growth will be more complicated and arduous than that of this year. Although the pressure of growth in next year will be bigger than that of this year, the economic failure will be little possible on the whole during this year, which has relatively provided a rare chance for further boosting the change of the mode of economic development. Therefore, policies for the latter half of the year should still be focused on the macro-control measures implemented during the first half and on the principle of "continuity, stability, flexibility and pertinence" put forward at the Economic Work Conference held by CPC Central Committee last year. At the same time, close attention should be paid to the change of situation and the rhythm and intensity of macro-control should be handled properly to continually advance the change of the mode of economic development on condition that the society can stand the pace of the economic growth. Simply, the macro-control should be conducted in a steadfast and flexible way.

II. Continually Adhere to the Normal Monetary Policy

Based on the fact that loans totaled 9.5 trillion yuan were added last year showing a rise of around 31%, the central bank in the beginning of the year planned to control the newly-added loans this year under 7.5 trillion yuan, up by 18.8%. Such a rate of increase, as it shows, is not slow and the monetary policy is moderately easy, because during the 5 years from 2004～2008, GDP underwent a double-digit growth and the average growth rate of loans was just 13.8%. If the GDP growth rate reaches 9% or so this year, the growth rate of loans will be five percentage points higher than the average during the previous five years.

Therefore, in the latter half of the year we must hold fast to the objective of 7.5 trillion yuan set forth in the beginning of the year. What merits our attention is the rapidly growing financing situation in the form of "bank-trust co-operation" after the bank lending has been rigorously controlled. By the end of May, the financial volume through "bank-trust co-operation" had reached 2 trillion yuan. Hence, we must exercise supervision over such cooperation, because we have had profound lessons in this regard during the 30 years of reform and opening up. The macroscopic loss of control and the economic overheating which had happened in previous years resulted all from the negligence of the market financing formed through non-bank loans despite the control over bank loans.

To check the negative interest rates prevailing in China in 7 months running, we should give a signal of positive rates. Nonetheless, to guard against the unnecessary adverse impact caused by the once-and-for-all increase of interest rates on the market during the downturn of the economic growth, we cannot do better than boost the interest rate liberalization at this favorable moment to bring up the deposit rates to a moderate level (Banks are virtually bringing up the rates in disguised form).

In view of the exchange rate policy, responses have come favorably from home and abroad to the elastic adjustment of exchange rates initiated recently. In the latter half of the year, we should put into practice the officially claimed reform of the exchange rate system according to relevant planning after making proper transitive arrangements so as to reinforce the elasticity of the exchange rates. It can ease the pressure from the Renminbi appreciation expectations on the whole as well as favor the steady development of China’s foreign trade and the gradual advancement of its structural adjustment.

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