Three external challenges facing the Chinese economy

15:43, March 22, 2011      

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The Chinese economy is faced with three external challenges in 2011. China is expected to keep its Consumer Price Index (CPI) this year below 4 percent, and there is still room for raising the reserve requirement ratio, said experts at the 12th China Development Forum sponsored by the Development Research Center of the State Council from March 19.

Yu Yongding, a research fellow at the Institute of World Economics and Politics under the Chinese Academy of Social Sciences, noted that China's economy is faced with three serious external challenges in 2011.

First, the global economy will continue to grow, but very slowly this year, though it may grow faster than the past two years. Second, the global inflation situation may further deteriorate as a result of the expansionary monetary policy adopted by the United States. Third, the world is facing a high risk of debt crises.

Yu believes that the U.S. debt problem has not been resolved. The world will always be at risk of another global financial crisis caused by the U.S. debt problem unless the United States lowers its debt level.

Li Daokui, a member of the Monetary Policy Commission of the People's Bank of China and a professor from Tsinghua University's School of Economics and Management, expressed that once there is evidence that the European Union’s debt crisis has stabilized in the next three years, financial market investors will shift their attention to the United States.

However, Li said when they find that the fiscal condition of the United States is extremely fragile, the U.S. treasury bonds will decrease in price and rise in yield, leading to the inevitable devaluation of the U.S. dollar.

Wu Xiaoling, the vice Chairman and a member of the Financial and Economic Committee of the National People's Congress and the former deputy governor of the central bank, said that it is impossible to set an upper limit for the deposit-reserve ratio, and as long as the interest rates can still cover commercial banks’ costs, the room for the gradual increase of the ratio will still exist.

He added that the central bank's decision last Friday to raise the deposit-reserve requirement ratio has nothing to do with the recent fluctuations of the Japanese yen but was mainly based on China’s domestic conditions. Whether the ratio will be raised again depends on the increase of outstanding funds for foreign exchange.

Fan Gang, the director of the National Economic Research Institute, said that because the central bank has locked up about 30 percent of the market liquidity, he has confidence that China will control its inflation rate to less than 4 percent.

By Li Jia, People's Daily Online
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