On January 17, the China Center for International Economic Exchanges (CCIEE) proposed that along with the rising risk of inflation, China should control policy incentive this year, such as reducing the budget deficit and controlling the credit growth rate. At the same occasion, Fan Gang, member of Monetary Policy Committee of the People’s Bank of China warned that the slow economic recovery of developed countries might add complexity to China’s decision making.
As these opinions have come from the CCIEE, their influence on the Chinese Government is expected to be significant. CCIEE was initiated and established by Zheng Xinli, former Vice Director of the Research Office of Policy of the Central Committee of the Communist Party of China, in which Zeng Peiyan, former Vice Premier of the State Council, acts as the Director-General.
Vice Executive Director of CCIEE Zheng Xinli wrote a paper to urge the government to control the budget deficit at around RMB 900 billion and reduce new RMB loans to about RMB 8 trillion this year. China’s budget deficit was RMB 950 billion and new RMB loans RMB 9.59 trillion in 2009.
Zheng Xinli predicts that the supply of China’s M2 broad currency this year will increase by about 18%, far lower than that of last year, which was nearly 28%.
In his speech at the China Economic Work Conference on January 17, Zheng Xinli said that China should readjust its monetary policies from being over loose to being moderately loose at a suitable time, and the monetary policy environment should ensure the normal operation of the economy so as to avoid worsening inflation.
However, the decision-making level might also face risks when ending incentive policies. On January 17, Fan Gang expressed that compared to developed economies, China’s economy has a faster growth rate, which means that China might become a target market for foreign venture capital. In turn, this could contribute to China’s asset bubble.
Fan Gang said that if the recovery of developed economies is slower than expected, they will prolong incentive policies and postpone raising the interest rate. If this happens in the U.S., foreign funds will flow into China, resulting in over liquidity in China.
Fan Gang emphasizes that during the next round of economic growth, China will have more of a challenge controlling the rise of asset prices than controlling consumption prices.
Wu Xiaoling, Standing Committee Member of the People's Congress and former Vice President of the People’s Bank of China, believes that inflation might appear within half a year to one year after the expansion of money supply.
Wu Xiaoling said that when considering an interest rate increase, the People’s Bank of China must pay attention to whether the actual interest rate has been negative for a long time, as well as the policy trends of other central banks in the world.
As disclosed by Yao Jingyuan, Chief Economist of the National Bureau of Statistics of China on January 17, the growth rate of the GDP last year was over 8%. As scheduled, the National Bureau of Statistics of China will publish GDP data for 2009 this Thursday.
The People’s Bank of China announced last week that it will increase the bank deposit reserve ratio. This is the first rise since the middle of 2008. This has signaled the liquidity of the banking system will be tightened. (Source: Dongfang Daily)