China: Economic Pragmatism at work, even with latest reforms

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Saturday, November 16, 2013  / The Analysts with Kola Ogunleye
 

China presented to the public its boldest set of economic and social reforms in nearly three decades yesterday, Friday November 15, 2013; relaxing its one-child policy and further freeing up markets in order to put the world's second-largest economy on a more stable footing.
 

The sweeping changes helped dispel doubts about the leadership's zest for the reforms needed to give the economy fresh momentum as three decades of breakneck expansion shows signs of faltering. However, the reforms may take years.
 

A document released by the Communist Party following a four-day conclave of its senior leaders promised land and residence registration reforms needed to boost China's urban population and allow its transition to a western-style services- and consumption-driven economy.
 

Pricing of fuels, electricity and other key resources - now a source of major distortions - would be mainly decided by markets, while Beijing also pledged to speed up the opening of its capital account and further financial liberalisation
 

Yesterday’s reforms are its boldest in decades
Analysts suggested the plans are the most significant since Deng Xiaoping led a series of reforms in the late 1970s and the early 1980s. Those changes eventually opened up the country to the outside world and set it on course to become the champion economy of emerging markets.
 

President Xi Jinping and Premier Li Keqiang, appointed in March, announced several breakthroughs in social policy, pledging to unify rural and urban social security systems and to abolish controversial labour camps.
 

The 60-point plan, more comprehensive and specific than initially thought, also eased concerns that Xi would need months if not years to take full charge of China's vast party and government bureaucracy.
 

RECALL: Monetary Policy – The China Example
Since 2007, the US subprime crisis, the global financial crisis and the European sovereign debt crisis have stoked volatility in global markets with varying degrees of impact on the world’s economies. To ensure the sustainable and steady development of the nation’s economy and maintain a stable price level, the People’s Bank of China (PBC) has adjusted its monetary policy stance three times to good effect.
  

The First Adjustment: Responding to the Crisis
Due to the global financial crisis, China’s GDP growth rate fell to 6.1% in the first quarter of 2009. Meanwhile, the consumer price index (CPI) dropped continuously, sagging to –1.8% in July 2009.
 

In response, the PBC adopted a moderately loose monetary policy stance and launched a series of measures to ensure economic growth and financial market stability. In the second half of 2008, the PBC strengthened its support for economic development, lowering the benchmark deposit and loan rates on five occasions and reducing the reserve requirement ratio (RRR) four times. In 2009, China reported GDP growth of 8.7% and was the first country to recover from the crisis.
 

The Second Adjustment: To Combat Inflation
As the world economy recovered, inflation in different countries began to rise from the second half of 2010. Due to soaring global commodity prices and a continuous rise in domestic labour costs and resource prices, China’s inflation pressure increased in the second half of 2011. In July 2011, China’s CPI growth reached 6.5%. In the face of upward inflationary pressure, the PBC took immediate action: it shifted its monetary policy stance from moderately loose to prudent at the end of 2010 and changed its monetary policy goal from fighting against the crisis to combating inflation. From 2010 to the third quarter of 2011, the PBC lifted its benchmark deposit and loan rates on five occasions and increased the reserve requirement ratio 12 times to 21.5%. By the end of December 2011, the rising trend of China’s price level had been contained with CPI inflation dropping to 4.1%. Meanwhile, China’s economy continued to grow rapidly and registered GDP growth of 9.2% in 2011.
 

The Third Adjustment: To Stabilize Economic Growth
As the European sovereign debt crisis continues to worsen, China’s economy has also changed. Economic growth has slowed and the inflation rate has dropped. In particular, the downside risks to economic growth have increased since early 2012, inflation has fallen rapidly in China. The CPI reading posted 3.4% and 3% in April and May, respectively. Faced with these new challenges, the Chinese government decided to stick to the principle of seeking progress amidst stability, appropriately balancing the relationship between maintaining steady and rapid economic development, restructuring the economy and managing inflation expectations. The priority was now to stabilise economic growth.
 

Accordingly, the PBC has gradually changed its monetary policy stance, lowering its reserve requirement ratio on three occasions in December 2011, February and May 2012. After these adjustments, the reserve requirement ratio had come down 1.5 percentage points to 20%. Meanwhile, the PBC reduced its benchmark deposit and loan rates in June 2012.
 

In addition, the PBC has also used a mix of monetary policy instruments to appropriately increase market liquidity. These monetary policy measures have been effective: in the first quarter of 2011, China’s GDP grew by 8.1% year on year while, in May 2012, China’s CPI inflation dropped to 3%.
 

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