Macroeconomic Control Choice at Mid-year: Inflation Fight Still Comes First

Banks began to issue “IOU notes” to power plants.Lately， a state-owned power plant in the central part of China ran into an abnormal matter. The power plant used to obtain a monthly bank loan to finance its procurement of fuel. But now what it obtains is just “Bank Acceptance Bills”(BA) which can only be converted into cash after a period of time， and the maximum period of time can last 6 months.This is what is called “tight monetary policy”. “Bank Acceptance Bills” serve as “money” paid by the power plant for its coal fuel to the upstream enterprises. Thus the BA analogous to “IOU notes” starts to circulate among economic entities. Before maturity date， no one can liquidate BA. In case of urgent cash shortfall， some corporations might opt to pay extra interests to secure cash from wealthy individuals.At about 2 o’clock on the early morning of July 15， Mr Chen， a vegetable dealer， braved the rain in his van to purchase goods at Xinfadi Agri-product Wholesale Market， the largest fruit and vegetable market in Beijing. A couple of hours later， he was sorting and laying out his goods in his stall at the entrance of a residential quarter at Baiziwan， Chaoyang District. Thinking aloud， he said， “Eggs are 4.8 yuan per 500 grams. Who has ever eaten such dear eggs? Chinese cabbage is more than 2 yuan per 500 grams and the price of pork belly has jumped to 16 yuan per 500 grams!”This is what is called “inflation”， which is transforming into real hard prices from stiff CPI numbers and entering into people’s daily life， no matter your payroll is boosted or has shrunk.Stephen Green， head of research at Standard Chartered Bank (China) Ltd.， noticed a peculiar phenomenon recently. Engineering machinery enterprises such as Sany Group Co.， Ltd and the like suffered a dramatic slump both in orders and sales over the past few months. He analyzed that it might be resulted from the sharp decline of investment projects that would be launched in the future. What’s more， it implicates that China’s economy mainly driven by investment is slowing down.Tightening up， inflation， economic slowdown—again it’s time for decision-makers to make a final choice. According to sources at ministries and commissions， among the three choices， inflation fight will remain to be the top priority of economic work in the latter half of the year.On July 15， a source related to National Development and Reform Committee (NDRC) said， “The current choices should be made between ‘maintaining growth’ and ‘curbing inflation’. Curbing inflation is at the top of the agenda， taking into account the present circumstances that high inflation will impinge heavily on and do more harm to the whole society.”A source at the Central Bank agrees that inflation is the pronounced problem that calls for immediate solution. “Only through steadfast perseverance is there a hope of beating inflation. Everything comes second to beating inflation and monetary policy easing will follow up.”According to our understanding， at the beginning of this August at the latest the Central Government will convene a series of conferences to set the tone of the economic work in the second half of the year and disclose relative macroeconomic control policies.Currently， the competent departments or bureaus of NDRC， Ministry of Finance (MOF)， the Central Bank， Ministry of Commerce(MOC)， the China Banking Regulatory Commission (CBRC) have been engaged in investigation and research across the country and will convene mid-year economic analysis conferences soon and submit some analysis reports and policy proposals to the State Council. The conclusions drawn from their investigation and research and their diagnosis of macroeconomic trends will influence the macroeconomic control policies that will be adopted by the Central Government for the second half of the year.Relevant Ministries initiated concentrated investigation and researchSince the beginning of this June， NDRC and the Central Bank have initiated investigation and research on problems that crop up accompanying economic operation. From June 14 to 16， the Department of National Economy of NDRC dispatched work teams to Jiangxi Province to conduct investigation and research on paddy rice production， rice market prices and etc.From June 9 to 17， the Bureau of Economic Operations Adjustment of NDRC convoked a series of first-half-year economic situation analy- sis conferences and seminars on industries such as iron and steel， construction materials， machinery and so on. From June 19 to 20， the Bureau of Economic Operations Adjustment of NDRC hosted a symposium on the first-half-year economic situation analysis of some areas at Xi’an. The relative departments from 16 provinces， autonomous regions and municipalities have attended the symposium and discussed new phenomena and new problems that were born from the economic progression in the first half of the year and brought forward proposals for the macroeconomic control and economic operation adjustment in the second half of the year.A few days ago， the Department of Price of NDRC also sent out work teams to local areas to investigate and research into summer and fall crop yields and price and cost fluctuations. On July 17， NDRC sent off another work team to Anhui Province and Jiangsu Province to investigate and research into price issues and problems in the economic operation.A source at NDRC who took part in the investigation and research summed it up， “if we don’t put priority on inflation fight in the first half of the year， the CPI data can only go up further. ” Meanwhile， “although the first half of the year registered economic slowdown， it was partially influenced by proactive adjustment policies. As for the economic growth in the second half of the year， there is no cause for much concern.”Nevertheless， the CPI data trend is still disturbing in the first half of the year when all policies goals were steered towards “curbing inflation”. According to the statistics issued by the NBS， the CPI in the first half of the year was up 5.4 % year on year， showing a month by month rising trend. In this June， the CPI even outstripped the expectations of most market agents to surge to 6.4%.The CBRC will implement a nationwide investigation and research in the near future. A source close to the CBRC said regulators must have investigated and researched into real estate， the Internet lending， small-sum loan companies， the risk warnings system of Financing Guarantee Institutions， the financing difficulty of smallsized enterprises and the capital chain in Jiangsu Province and Zhejiang Province.A source at the Central Bank briefed us that all the departments of the Central Bank have carried out investigation and research within the scope of their respective functions and duties and have investigated and researched into monetary policy decisions in collaboration with the relative ministries and commissions. The investigation and research done by the Central Bank touched upon total social financing volume， local financing platforms， private lending and protection of private financial data.The source at the Central Bank noted that the investigation and research unfolded the dynamism of shadow banking and private lending and also implicated that the momentum for economic turnaround remains to be very strong.The source at the Central Bank has upbeat outlook on economy but is downbeat about risks， saying “I’m upbeat because private sectors are full of drive. Although financing is difficult， yet in most cases people only ask whether they can secure loans or not without referring to the interest rates. It indicates their strong confidence. By risks I mean which industries the money should be allocated to so as to make sure it’s safety， profitability and capability of offsetting financing costs.”The abovementioned source is harboring concern over another issue—economic restructuring， which may seem even grimmer in the eye of the relative departments and bureaus of NDRC. The investigation and research executed by the Bureau of Economic Operations Adjustment of NDRC uncovered that the phase-out of outdated production capacity in overcapacity industries and industry upgrading are moving at a snail’s pace.An even graver problem was unveiled by the investigation and research done by other competent departments of NDRC that energy conservation and emission reduction tends to become worse instead of improving. A source at the relative department elaborated on it. In the first half of the year， the total electricity consumption has risen by 12.2 %， and the June alone registered an increase of 13%; while the GDP grew by 9.6% over the same period. “It shows that our energy consumption is going up instead of down. In addition， at the beginning of this year the State Council has set a full-year energy consumption reduction target of around 3.5%. So what will come of the second half of the year?”Besides， the first half of the year witnessed slow moving of reforms in some critical fields， the investigation and research carried out by other competent departments and bureaus of NDRC also found out. Take income distribution as an example， at the onset of the year the State Council put forward “two ‘simultaneous’ targets that people’s income increase be kept pace with economic growth and people’s salary growth be kept pace with the productivity rise.”But the figures released by the National Bureau of Statistics (NBS) as of July 14 reveal a rise of 7.6% in real terms in the disposable income of urban residents and a 9.6% jump in GDP. Citing a source at the relative department or bureau， “on the whole local provinces and cities reported a resilient GDP growth of above 10% and fiscal revenue of both the central government and the local governments also soared， leaving household income growth far behind.”The source holds the view that issues identified by the State Council at the onset of the year such as income distribution and price reform of resource products will come under great stress in the second half of the year.Inflation fight remains the top priorityOn July 13， NBS spokesman Sheng Laiyun told a press conference that there is substantial liquidity globally， and domestically we are wedged between two daunting pressures， a long-term trend of rising costs on one side and price control on the other. Although Sheng Laiyun later continued to explain that favorable conditions have been shaping up for price stability， he acknowledged that it would take some time before the favorable conditions truly transform into reality. In a word， stabilizing prices would remain at the top of macro-control agenda.For now， the NDRC and the Central Bank concord that inflation prevention should be given first priority. According to the NDRC， inflation prevention will continue to be the most importance-weighted policy. It is not only because of the fact that at the work conference held at the start of the year the State Council decided to place the focus of the whole year on curbing inflation， but also due to the fact that at present the price spillover effects are yet to wear off and variables capable of triggering price hikes are still lingering on.According to the source at the NDRC， the price hikes in the first half of the year left many spillover effects. For the time being， it is tricky to forecast how long the spillover effects will last and even the prices of daily consumer goods pose great difficulty for predicting and controlling. Furthermore， with the US Federal Reserve Chairman Ben Bernanke dropping ahint that the US will stick to quantitative easing monetary policy， China is set to be faced with more imported cost increase.The source at the Central Bank said that we are still in the dark as to whether CPI will peak or not. Only through steadfast perseverance is there a hope of beating inflation. Everything comes second to beating inflation and monetary policy easing will follow up. Or otherwise just let the inflation run wild and then tighten up again and fix the inflation.The stance taken by the MOF makes it tentative in implementing resource tax reform. At the national symposium recently held by finance departments (bureaus)， officials voiced their quandary that they suppressed their attempt to adopt tight fiscal policy in fear of driving CPI up. The resource tax reform runs aground in such a quandary in spite of local governments’ vociferous support. Raising taxes especially of energy source materials will have a distinct impact on CPI.An official at the MOC echoed that under the current situation inflation prevention overweighs other matters. The official said， “the CPI will continue to pick up in July and August， resulting in great pressure and stress. Tight monetary policy will be maintained in the third quarter and might come to a stop in the fourth quarter but won’t be reversed.”In the first half-year， tight monetary policy not only caused currency shortage in the market but also impinged on the whole economy growth. Based on the data released by the NBS as of July 13， GDP growth of 9.6% and 9.8% recorded for the third and fourth quarter of last year while the figure edged down to 9.7% and 9.5% for the first and second quarter of this year. As far as the data is concerned， GDP growth did decelerate.But the NDRC showed no concern at all. And a connected source pointed out that the period-on-period movement is quite encouraging and has even exceeded the previous market forecast although the data of the first half-year with June included implied a slight slowdown in the whole economic growth. Vitality in the real economy finds expression in the ongoing“power shortage” and “labor shortage”. “The deceleration of the economic growth has something to do with the withdrawal of the rigorous economic stimulus measures and the economic restructuring. Moreover， a slight slip in the economic growth rate would do no harm.”The referred source observed， “No macrocontrol policy should be viewed as a panacea to all problems. Tilting towards one side will surely result in frustration on the other side. ”In fact， the State Council convoked executive meetings on July 13 when the NBS revealed the statistics. Premier Wen Jiabao noted that stabilizing price would still level a “top prior-ity” in the macroeconomic control and made the first mention of “proactive policy”， emphasizing the evasion of bumpy vacillation in economic growth. It sent out a signal to the market that macro-control policies targeted at fighting inflation will still take the utmost precedence.Nomura Securities claimed in its research report that a consideration of all statistics revealed that in case of high inflation monetary policy usually further tighten up in the second half-year following a modest economic downturn.Peng Wensheng， chief economist of China International Capital Corporation (CICC)， believed that the monetary policy will stay tight in the short term， adding “according to our estimation， the latter half-year will not see any sign of easing monetary policy， with high inflation as the principle feature of the current economic operation and the slim chance of a significant drop in the economic growth.”Disputed macro-control policiesDespite the fact that all ministries and commissions chorused their decisiveness in putting first inflation fight in the second half-year， some economists reflected that overemphasis on inflation and tight monetary policy is likely to hurt China’s economy.On July 9， at the symposium initiated by Li Daokui， a member of the Central Bank Monetary Policy Committee， economists like Ba Shusong， Chen Dongqi， Wang Jian and Chen Xingdong argued that China’s economy has set out to decelerate and it is in consequence of the “overkill” of macrocontrol policies.Chen Xingdong， chief economist of BNP Paribas Securities (Asia)， believed that policies mainly factor in the rapid downward slide of China’s economy. He explained， “the purpose of the present monetary policy is to redress but not to normalize and it put the management under mountainous pressure.” In his view， the macro policy easing should be opted for under some circumstances.Wang Jian， secretary-general of the China Society of Macroeconom- ics， said China is undergoing a slump in its investment demand. The first five months saw a run-up of 6.4% in the total planned investment of recently started projects which usually signify future investment. Actually， the investment of recently started projects has already marked a negative growth， if the PPI of the period excluded. He even went further to say that with this year as a start China will subject to an economic downturn for three consecutive years.Yuan Gangming， research fellow at the Center for China in the World Economy (CCWE) at Tsinghua University， said that macro-economic control was supposed to pull down the CPI while maintaining economic growth. However， the current situation stands in stark contrast to the expectation， with economy instead of CPI sliding down. Thus it impressed Yuan Gangming that these macro-economic control policies are on the wrong track. The government failed to keep the CPI down and fueled it instead and this year is faring worse than the year of 2008.Obviously， the economic slowdown didn’t cause a stir in the government. A source at the NDRC said that whether the investment drop or the macro-economic slip is insignificant. The investigation and research testified that investment remained robust at the local government level， dispelling any concern about the follow-up investment.The same sort of sanguine outlook was evinced by the MOC. An official argued that there shouldn’t be “overkill”considering the high maintenance of funds outstanding for foreign exchange and the enormous surplus in the past two months. This is a contradiction between inflation fight and corporate financing， which boils down to a matter of appropriateness.The abovementioned official at the MOC said there is discrepancy within the ministry over whether China’s economy has headed on a downward path. Judging from the sales order load at the hands of corporations， the economic size will be kept intact this year even if the export growth slows down. Foreign trade will pull through the year as long as there is no upheavals in the external environment， that is to say， no big convulsions in the European debt crisis or in the US or the North Africa.The NDRC holds a different view from the MOC while the MOF is gripped by worries that the economic slowdown will probably constrain the financial revenue. At the national symposium recently held by finance departments (bureaus)， Xie Xuren， Minister of Ministry of Finance， stated that a revenue dent will result from raising the individual income tax cutoff point and continuing to provide preferential tax policies to small meager-profit enterprises and the full-year revenue growth will show a ‘high to low’ trend. In light of the analysis of some present officials from the finance departments at the local government level， the second half of the year is extremely unfavorable for tax revenue growth. The primary cause is not the tax cut evoked by the amendment to the individual income tax but rather the trepidation over the possible decline of enterprise tax. The macro-economy being on a descending path is a source of uneasiness and economic downturn will have impact on the profit of enterprises.Peng Wensheng， chief economist of CICC， estimated that in the second half of the year， while combating inflation great importance will be attached to supply increase policies， which includes doing a good job of affordable housing construction， ensuring sufficient supply of farm produce and increasing pork supply through subsidizing. Regarding aggregate demand， if there is a need to fine-tune macro policies， then financial policies are anticipated to be viewed as a precursor and the examination and approval process of investment projects is likely to be expedited.(The author: from The Economic Observer)