China seeks to fine-tune the economy

09:46, March 01, 2010      

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China's stimulus measures were more akin to a blunderbuss than a sniper's bullet. As economist Stephen Green said, "Everything that could be done was done."

But now, there are increasing signs that the country wants to target its policies more precisely.

Following two hikes in the reserve requirement ratio of commercial banks - the proportion of money they must keep aside as reserves - it is widely believed that a new bout of policy tightening has begun.

The hikes came after the authorities imposed a series of real estate-targeted policies late last year, sending an unequivocal signal that the rapid rise in home prices is intolerable, analysts said. Interest rate hikes could also be in the pipeline if inflation continues to pick up.

However, facing the still uncertain economic recovery across the globe from the financial crisis and its murky export prospects, China is unlikely to overdo its tightening measures. Instead, it would try to nip economic overheating in the bud while ensuring stable economic growth, according to analysts.

"The State Council (the cabinet) seems to be treading a tightrope as it seeks a balance between ensuring stable growth and preventing overheating," said Standard Chartered Bank economists Stephen Green and Li Wei in a recent report.

China's gross domestic product (GDP) growth reached 8.7 percent year-on-year in 2009, but bottomed out from 6.2 percent in the first quarter and accelerated to hit 10.7 percent in the fourth.

It is expected to rise further in the first quarter of this year, which risks triggering overheating of the economy, some fear.

Proper tightening - although the authorities may not use the term - could be adopted to cool it down, analysts said.

"China is set to implement an exit strategy (to the fiscal stimulus) as its economic growth picks up," said Zhang Xiaojing, an economist with the Chinese Academy of Social Sciences. "But it would be done in a very careful manner."

In the real estate sector, for example, the authorities have vowed to curb speculative deals while encouraging more investment in building low-cost affordable housing for low-income earners.

It is estimated that real estate accounted for about a quarter of China's fixed-asset investment last year.

Land sales and related activities constitute the main source of revenue for local governments. If house prices drop dramatically, local governments would suffer from slumping income and could be plunged into an abyss of severe debt.

"If the real estate sector were to be endangered, it would not be a problem for individuals or banks," said Zhang.

"It would be a problem for national finances" because the central government would have to save bankrupt local governments.

Source: China Daily
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