Global uncertainties take toll on Chinese economy

15:52, March 22, 2011      

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The unrest in the Middle East triggered by the Western-led military action on Saturday coupled wit the uncertainties of Japan's ongoing nuclear crisis are set to cast more clouds over the global financial market, triggering more controversy over challenges facing China's economy.

China's central bank announced on Friday it will raise commercial banks' reserve requirment ratio (RRR) by 50 basis points to the 10-year high of 20 percent to rein in the mounting inflationary pressure, which, as Chinese Premier Wen Jiabao put it, is hard to tame like a "tiger." However, tightening the domestic money supply is far from enough because the world's second largest economy is increasingly susceptible to the climate of the global financial market.

International commodities prices in particular responded dramatically to the Japan quake and are expected to be even more volatile as unrest in the Middle East continues to unfold. Last week, crude oil in the New York and London markets was hit hard enough by the Japan nuclear accident to be closed the lowest in a three weeks period on Tuesday, followed by a rebound on Wednesday and Thursday over the clashes in Libya and Bahrain.

Oil prices ended up falling when a cease fire was declared on Friday. But the air strike to Libya by the Western allies on Saturday fueled the concern over the oil supply in the future. Crude prices went up again on Monday this week.

In addition, Japan's nuclear accident after the earthquake and killer tsunami will probably push the demand for oil higher. Japan's reconstruction needs more power. But governments in countries with nuclear power are getting more cautious about nuclear power after the nuclear leakage in Japan. That will further consolidate the dominance of oil in the world power mix.

The fluctuation of the international oil prices may have the most immediate impact on China's economy among the commodity prices. Stuart Gulliver, CEO of HSBC, said at a forum in Beijing on Sunday that given China's high sensitivity to international oil prices, if the unrest in the Middle East continues, will bring even more inflationary pressure inChina.

Fuel oil price increase is imminent, analysts say in China. Many believe that it could happen in early April at the latest. If that proves to be true, prices in China could be pushed higher in the near future.

On the front of liquidity management, the dilemma brought about by the international market is also evident. The central bank's move of raising deposit-reserve ratios reflects its cautiousness on interest rate policy in the context of the much lower interest rates in developed markets. However, that may also highlight the importance of interest rate in the monetary policy as there is limited room for any further maneuverfor quantitative tools on one hand and the necessity of resorting more to interest rates or foreign exchange adjustments on the other.

China's interest rate hikes are imminent, said analysts at banks. ANZ Bank, which one of the largest banks in Australia and has China operations, predicts that the People's Bank of China is poised to raise the interest rate soon. Lu Zhengwei, an economist at the Industrial Bank, thinks the hike would happen in the second quarter of the year. And CitiBank says the hike would take place this month and another two increases would come in the second and third quarter of the year.

CitiBank also expects the appreciation of the Chinese currency to occur at a faster pace this year, which it believes can ease the pressure of imported inflation caused by rising commodity prices on the international market.

Lian Ping, chief economist of the Bank of Communications, also purports that more yuan appreciation could reduce the costs of China's commodity imports on one hand and facilitate the industrial upgrades on the other.

However, the unprecedented injection of capital by the Bank of Japan and the upcoming intervention of G7 to cool down the rising Japanese yen after the quake will create massive liquidity on the Japanese market. The European Central Bank is more likely to delay the tightening of the monetary policy in the euro zone due to the impact of the Japan quake. As a result, the gap of the monetary policy if China further tightens its monetary policy while developed economies keep relaxing theirs. That can lead to more excessive liquidity inflow into China.

In addition, China has already seen trade deficit in February as a result of the export slowdown and import rise. If the exchange rate is adjusted too quickly, it could hurt China's exporters and jobs significantly, particularly China has moderated its economic growth target.

Apparently Chinese policymakers are facing a very complicated global market landscape, which has significant implications on China,s economy. Hopefully the uncertainties will be dismissed soon, as World Bank says today in Beijing.

In its report about the East Asian economy, the World Bank estimates that the Japan quake would have "limited" and "short-lived" effect on the emerging economies in Asia in the short term and the Japan reconstruction would stimulate the country’s economic recovery.

By Li Jia, People's Daily Online
  Weekly review  


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