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Relax money policy, not price control

By Hong Liang (China Daily)
Updated: 2008-09-16 16:21

Latest economic data painting a less-than-rosy growth picture have raised the question if this is the time to switch to an expansive monetary policy from a restrictive one.

The slowdown in export growth in the past months should come as no surprise to anyone who has been following the unfolding story of the US subprime credit crisis, which is threatening to push the US into a recession and drag down global growth. The decline in orders from the US and, to a lesser extent, the EU has dealt a serious blow to many manufacturing enterprises, particularly those in Guangdong province.

These manufacturers, especially those in the private sector, are additionally squeezed by the tightening supply of credit and rising cost of energy and a wide range of industrial materials. In the Pearl River Delta region, for instance, thousands of small- to medium-sized enterprises are reported to have closed.

The plight of the region is reflected in a drastic slowdown in the growth of the economy of Shenzhen, the region's business center. The city's GDP growth in 2007 fell to 14.6 percent from an average annual growth rate more than 27 percent in the past 26 years. Worsening economic prospects have prompted the city authorities to revise the 2008 projected growth rate to 12 percent from the earlier estimate of 14.7 percent.

Xu Zongheng, Shenzhen's mayor, was quoted to have said in a radio program last Tuesday that his city is facing economic conditions that were "even tougher and more severe than the 1997 Asian financial crisis". He said that the government would provide support to help businesses raise money and increase land supply for property development to boost economic growth.

Some economists believe that government planners in Beijing are beginning to think along the same line. With the inflation rate falling below 5 percent in August, there is obvious room for the relaxation of the tight money policy.

With export growth constrained by the continuous slowdown in overseas demand, and domestic expenditure, including consumer spending, depressed by poor corporate performance and the stock market crash, the main impetus for growth, at least in 2008, must come from fixed asset investment in infrastructure, properties and plant and machinery. For that reason, the availability of credit and the cost of money will have a direct impact on the overall economic performance.

So far, the monetary authorities are seen to have pursued a more relaxed monetary policy than before on a selective basis. For example, the central bank and other government agencies have jointly requested banks to increase their lending to the small- and medium-sized companies whose capitals are drained by rising costs.

With the PPI, or production price index, remaining high at 10.1 percent in August, economic planners are expected to continue to move cautiously and slowly in shifting the policy focus to economic growth from price inflation. To minimize the risk of rekindling the flame of inflation, it would be prudent to postpone any plan the government may have to restructure the price control mechanism that is applied to several key commodities and utilities, including fuel, water and electricity.

Doing that too soon could further drive up the PPI, exaggerate the squeeze on corporate profits, and compromise any initiative to boost economic growth.

E-mail: jamesleung@chinadaily.com.cn