China pledges steady as it goes
By Olivia Chung

HONG KONG - China's Central Economic Work Conference, which annually sets the tone for economic strategy, has raised concerns of rising inflation and asset bubbles after pledging at its latest meeting to continue a proactive fiscal policy and a moderately easy monetary policy next year.

The conference concluded its three-day meeting last week by also saying it would accelerate urbanization and reform of industrial structures to boost consumption and reduce overcapacity.

Recent signs of economic recovery had led some analysts to forecast before the meeting that the government of the world's third-largest economy might pull back from its plan announced in November last year to spend four trillion yuan (US$586 billion) in a stimulus package to counter the impact of slumping exports amid the global financial crisis.

China's gross domestic product (GDP) jumped 8.9% in the third quarter from a year earlier, up from the gains of 7.9% in the second quarter and 6.1% in the first three months this year.

The Chinese Academy of Social Sciences, a government think-tank, said last week in a publication that there was no doubt that China could fulfill its goal of 8% growth this year. Chen Jiagui, the publication's main compiler, said at a press conference that the country's GDP would expand 8.3% this year and accelerate to 9.1% next year.

President Hu Jintao, however, was quoted by Xinhua news agency as saying in the meeting that China had undergone the most difficult year of economic development in its history and that the recovery was shaky.

The global financial crisis exposed China to a crisis of severe overcapacity as export demand shrank. The National Development and Reform Commission (NDRC), the country's top economic planner, urged authorities and manufacturers last week to rectify the problems in the cement, steel and flat-glass manufacturing industries.

Last month, imports jumped more sharply than expected, rising 26.7% year-on-year to US$94.56 billion, compared with a decline of 6.4% in October, the first increase in 13 months, on strong consumption of raw materials such as iron ore, paper, copper and plastic.

Exports failed to increase year-on-year, contrary to expectations, but saw the smallest decline so far this year, dropping 1.2% to $113.65 billion last month on an annual basis, after declining 13.8% in October. The monthly trade surplus shrank to $19.09 billion from $24 billion in October.

Policymakers at the economic work conference said China next year would step up efforts to boost domestic demand and adjust production capacity structure to reduce the over-reliance on an investment-led economy. The conference said China would make expansion of domestic consumption, particularly consumer spending, a key task, according to a Xinhua.

To boost domestic spending, Beijing will allow rural populations to migrate to larger cities by easing restrictions on gaining permanent residency in the nation's small- and medium-sized cities, while also speeding up urbanization in rural areas. Last year, the rural population stood at 720 million, or about 54.3% of the country's total.

A one percentage-point rise in urbanization will result in the movement of an additional 10 million farmers to cities, according to China Daily, citing Qi Jingmei, a senior economic analyst with the State Information Center. China's urbanization ratio was 45.9% last year, the report said.

Despite the absence of a specific reference to the Chinese currency, the yuan, the conference's pledge to maintain the "continuity and stability" of foreign demand for its goods may hint at Beijing's determination to keep exports price-competitive. Keeping the yuan stable has reinforced China's reliance on exports and state-led investment.

Economists said the government's strategy would increase the supply of the currency and eventually to rising inflation and asset bubbles next year.

Lian Ping, chief economist at the Bank of Communications, said China's investment growth could be 25% to 30% next year, which alone would need money supply of up to 4 trillion yuan. More money would be needed to fuel industrial production and other economic activities, he said.

Loosening control of the household registry system in small- and medium-sized cities and towns will allow a greater flow of people from the countryside. This will lead to a real-estate boom.

"The increasing demand for houses will also increase demand for currency in circulation," Lian said.

Meanwhile, there is an increasingly clear trend of rising grain and commodity prices, while reforms in pricing energy and natural resources, such as oil and the industrial use of water, will further add to inflationary pressures.

The real challenge of 2010 is to ensure a soft landing for the rapid growth of loans, said Cheng Manjiang, an analyst of BOC International, a Bank of China securities affiliate. He expected the amount of new yuan loans to slow to 8 trillion yuan next year from this year's projected 9.5 trillion yuan as the government maintains its moderately loose monetary policy.

Banks in China have lent 8.92 trillion yuan of local-currency loans in the first 10 months of this year, up 5.26 trillion yuan from a year ago. The figure surpasses the 5 trillion yuan full-year target for 2009 set at the beginning of this year.

Beijing will maintain its current policy and refrain from increasing interest rates or the reserve requirement ratio banks in the next several months, according to Ting Lu and TJ Bond, economists at Bank of America-Merrill Lynch. The yuan-US dollar exchange rate will also be kept stable in that period, they said.

Inflation could be as high as 4% next year, according to some economists, which they say is controllable. That compares with a rate of minus 1.1% for the first three quarters of this year.

China's November consumer price index rose by 0.6%, the first year-on-year rise in 10 months, while it fell 0.5% in October. The retail price of rice was up 3.35% and of flour 4.2% last month from January, the NDRC said on Monday.

The statement said prices for edible oil may temporarily rise sharply due to changes in petroleum prices, the value of the dollar and speculation.

Consumer inflation would rise to 4%, the financial research center of Bank of Communications (BoCom) said in a report last week. Overly brisk stock and property markets were always a prelude to inflation and money flow should be regulated to prevent asset bubbles, it said. The report advised that bank loans should be extended at a more reasonable pace and that policy should be fine-tuned next year.

Jing Ulrich, the chairman of JP Morgan's China equities business, said the conference should lay to rest any remaining concerns about a premature exit from the government's macro stimulus program. However, she noted that property prices around the country had been soaring since the second quarter of this year amid robust demand from both end users and investors. This has reduced buyer accessibility and raised worries over asset price bubbles.

Prices in leading cities such as Beijing, Shanghai and Shenzhen have jumped by more than 50% this year, fueling concerns that a property bubble is building up. House prices in 70 large Chinese cities were up 5.7% in November from a year earlier, the largest gain in 16 months, the National Bureau of Statistics said last week.

Olivia Chung is a senior Asia Times Online reporter. (Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)