China's interest targeted on harmony
By Leanne Wang
HONG KONG - The Chinese government, keen to promote domestic growth as exports to key markets are hit by the global financial crisis, is expected soon to follow the Hong Kong Monetary Authority and Australia in slashing interest rates.
While other countries are cutting rates particularly to improve liquidity in their financial systems as concerns about the global financial sector reduced banks' willingness to lend to each other, China is concerned that it maintains growth to avoid social instability.
The Hong Kong Monetary Authority, which acts as the city's central bank, effectively allowed a one percentage point interest rate reduction to 2.5%, as of Thursday. Unusually, the HKMA
acted in advance of rate moves in the United States, which it typically follows to help maintain the local currency's peg to the US dollar. The Reserve Bank of Australia this week cut its benchmark interest rate one percentage point, taking the overnight cash rate target to 6%.
China last cut the one-year lending rate on September 15 by 0.27 of a percentage point, the first reduction in six years. A commentary in the China Securities Journal on Wednesday said conditions are "ripe'' for a rate cut.
Measures already taken to boost domestic consumption include expansion of a pilot scheme to give financial subsidies for farmers to buy home appliances.
The United States, China's biggest export market, may already have entered a recession, while the expanding financial crisis may slow global growth next year to 3%, according to an International Monetary Fund forecast in the draft of its latest World Economic Outlook, Bloomberg reported. The IMF in April predicted 3.7% growth.
If gross domestic product (GDP) growth in the US slows by 0.7 of a percentage point, China's GDP growth will drop 0.94 of a percentage point, according to a study by the Chinese Academy of Social Sciences.
Just under 20% of China's exports, or US$232.7 billion worth, out of a total valued at $1.22 trillion, were sent to the US last year, equivalent to 33% of China's total GDP of $3.6 trillion. That excludes re-exports to the US from Hong Kong and Taiwan.
US consumers, increasingly straightened and unable to obtain credit, are turning away even from China-made goods, slowing growth in China's exports to the US to single digits for the first time since 2002. Growth in these exports in the first seven months of the year slowed to 9.9% year-on-year to a total of $140.39 billion, down 8.1 percentage points from the same period last year, Chinese Customs data show.
Manufacturers, already battling to absorb commodity prices that are rising twice as fast as the value of Chinese exports, are facing further hits from their other leading market, the European Union, as the financial crisis spreads.
Net export growth is tumbling from admittedly remarkable highs which hit a peak of 162% year-on-year growth in February. In real terms, exports grew 12.6% year-on-year in the first eight months in 2008, down from 20.2% in 2007, Barclays Capital estimates.
Falling export growth could help cause GDP growth to slide to 9% in the fourth quarter, from an estimated 10.2% third-quarter expansion, 10.4% in the April-June period and 10.6% in the first three months of the year, the State Information Center forecasts.
Growth of 9% is generally considered the minimum for China to provide enough jobs for new labor, prompting speculation that the government will institute a raft of measures to defend that line, including an easing of restrictions on fixed-asset investment.
In recent years, Beijing has walked a tightrope of seeking to rein in inflation and overinvestment in an overheating economy while boosting domestic consumption to head off friction with trade partners complaining about the government allowing its currency to remain artificially weak to maintain export levels.
Last year, retail sales grew 16.8% to 8.921 trillion yuan (US$1.3 trillion), equivalent to 36% of GDP. Even so, that leaves huge room for growth before domestic consumption becomes the largest contributor to GDP. Allowing for inflation, retail sales grew 15% year-on-year in the first eight months this year, compared with 12.3% in 2007, NBS data showed.
Personal consumption has been supported by strong income growth, boosted by the robust economy, while some firms are now paying employees the traditional annual bonus in monthly installments for the purpose of tax deduction. Even so, income growth has also been slowing as the economic growth declines. Real urban per capita income rose 6.3% in the six months to June, compared with more than 10% annually between 2002 and 2007, NSB figures showed.
As the US financial crisis started to spread late last year and early in 2008, Beijing stepped in to boost domestic consumption, reversing earlier tightening measures. The Ministry of Commerce introduced a pilot scheme entitling each rural family in Shandong, Henan or Sichuan provinces to a 13% government rebate on the purchase of up to two television sets, two refrigerators and two mobile handsets.
This was Beijing's first initiative to boost domestic consumption by directly granting financial subsidies to consumers in rural areas, where populations have benefited less than coastal provinces from the country's economic boom. Effectively, the government is taking money out of one pocket to put in another, as it also offers a 13% tax rebate for exports of home appliance items. Mainland media have speculated that Beijing might raise the export rebate rates to offset the effect of a stronger yuan.
The effect of granting subsidies to farmers who purchase these goods is to remove a policy bias towards exports and spur manufacturers to tap the huge pool of potential consumers in rural areas.
Plans to expand the pilot scheme to another 12 provinces and other home appliance items was halted after the devastating 7.9 Richter scale earthquake hit Sichuan on May 12. But China Central Television has said the scheme worked so well that Beijing was likely to expand it.
The Ministry of Commerce recently confirmed that it has worked out an expansion plan that, seconded by the Ministry of Finance, would be presented to the State Council, or cabinet, for final approval.
A queue of home appliance producers, such as electronic appliances maker Changhong, white-goods manufacturer Haier and TV-maker Konka, which have been bidding to join the scheme, are readjusting their production plans and training dealers to push into the rural market.
"This is really good news for us. We've been very much worried that slowing-down exports will hurt our profitability," said a sales manager at Shenzhen-based TV-manufacturer Skyworth.
The advent of a market economy over the past three decades has brought the loss of the "iron rice bowl", further encouraging Chinese to save against the event of illness, job loss and for their children's education.
With that in mind, Beijing is also seeking to improve the country's social welfare and social security systems, extending them to cover rural residents. That should not only help boost consumers' sense of security and reduce their need to save for hard times, but is also in line with Beijing's goal of building an "harmonious society".
This year, the Chinese government has also scrapped all agricultural taxes, increased subsidies on farm produce, ended fees for primary education across the country and introduced medical insurance in rural areas.
The income floor for personal income tax has been raised to 2,000 yuan (US$293) per month from 1,600 yuan effective from March 1, 2008, benefiting low-to-mid income residents.
The government has also improved purchasing power by tackling inflation. Premier Wen Jiabao in March said that a target inflation, measured by the Consumer Price Index (CPI), at around 4.8% this year. CPI inflation in August fell to 4.9%, compared with a 12-year high of 8.7% in February.
China's tight monetary policy, which included raising its reserve ratio requirement for banks to as high as 17.5%, was introduced at the end of last year to tackle excessive investment and bank lending. The policy has effectively cooled down the overheating economy, hitting in particular the high-end real estate market and forcing many small and highly polluting manufacturers with low cash-flow to close.
Beijing is now reacting to a sharper-than-expected decline in industrial output growth in August to 12.8%, from 14.7% in July, and the prospect of spillover effects from the global financial turmoil.
On September 15, the People's Bank of China's cut the benchmark one-year lending rate by 27 basic points to 7.2% and the reserve requirement ratio by 100 basic points to 16.5% for smaller banks.
The benchmark lending rate may be cut by a total of 81 basis points in the next 12 months and the deposit rate by a total of 54 basis points, said Barclays Capital economist Peng Wensheng.
The easing policy is considered to be aimed at helping small and medium-sized businesses gain access to bank credits, rather than helping the new rich class hurt by the bursting of the country's equity and real estate bubbles.
Property developers such as China Vanke and Shimao Property Holdings were reported last month to be cutting apartment prices by 15% to 35% in a bid to push through sales. Chinese housing prices may drop as much as 50% over the next few years, according to insurer PICC Property & Casualty Co, the Hong Kong-based South China Morning Post reported last month.
That will help bring prices down to affordable levels for more of the growing middle-class, while an expected easing of fiscal spending will increase investment on and employment in still much-needed infrastructure, such as underground mass transit systems.
Leanne Wang is a journalist based in Hong Kong.
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