Macro Review: Policy and External Demand
09-17 15:19 Caijing Magazine
Stimulating consumer demand could do a lot more for China's export-oriented economy than easing monetary policy.
By staff reporter Li Zengxin
Any monetary policy adjustment in China must be combined with economic structural change and corporate transformation to achieve its goal, said Shen Minggao, Caijing's chief economist.
The reason is that China's relatively strong domestic demand is not sustainable over the long run, and may do little to keep economic growth from slowing in the face of deteriorating external demand.
In the fifth edition of Caijing Macroeconomic Weekly Review, released September 16, Shen stressed the core issue for China's future sustainable growth lies in stimulating domestic demand by encouraging spending among the nation's consumers. And this step requires a fundamental change in policy support from export oriented to domestic consumer growth.
China has been showing more "major economy" effects recently in two ways: External demand growth contributed less toward supporting China's export growth; and, at least to some extent, China's growth rate has influenced international commodity prices.
Therefore, China's export growth is approaching a bottleneck that has nothing to do with the U.S. subprime crisis, yuan appreciation, or cuts in export, value-added tax rebates. "The impact from external and internal policy tightening did no more than speed up this process," Shen said.
China's export growth has shown some weakness. In August, export growth slowed notably. Economic setbacks in the European Union and Japan dragged down growth in emerging markets. As a result, growth in shipments to Europe and Japan apparently fell for exporters Russia, India and Brazil as well as China.
It would be unwise for China to wait for the United States to recover. Bad news for the old, large investment banks could mean two or three more years of sluggishness for the global economy, Shen predicted.
Hence, the only way out is to spur domestic demand. For the near term, Chinese domestic consumption appears to be robust, as monthly retail sales growth has accelerated so far this year, partially offsetting slowed exports.
However, consumption growth faces several obstacles. First, the real estate and automobile sectors – two pillars for local economies – have turned weaker. Second, in the long run, as deteriorating external demand drags down exports, investment in export-related industries will fall. Third, growth in industrial output continues to slow. Bankruptcy or idled factories may drive up unemployment rates and affect household income growth.
Relaxing monetary policy will somewhat loosen credit constraints for companies. But because of the limited scale of consumer leverage, interest rate cuts are more likely to stimulate production rather than consumption. As uncertainties prevail, commercial banks are reluctant to lend. Therefore, easing monetary policy may have only a limited effect, unless such steps are implemented in combination with structural changes and corporate transformation.
To achieve this goal, the government needs to set a medium-term objective to stimulate domestic demand, clarify market expectations, and build investor confidence. The strategy should include:
— Normalizing prices by abolishing price controls on major inputs;
— Fiscal support through tax cuts, less government spending and upgrading structure of fiscal expenditure;
— Adjusting inflation targets by allowing higher inflation, leaving room for policy changes;
— Stimulating employment by ensuring the healthy growth of small- and medium-sized enterprises, encouraging consumption growth, and creating new job opportunities.
The fifth edition of Caijing Macroeconomic Weekly Review also contains a section called Caijing Web Site Columnist's Opinion – Economic Adjustment Unavoidable. In the section, Shen and Professor Song Guoqing of the Peking University China Center of Economic Research explore current economic developments.
Song thinks China's economic adjustment is an unavoidable and natural process, and that the nation's falling inflation rate could be explained by the slowing pace of monetary transactions. He warned that any large-scale fiscal stimulus is unlikely. And even if taxes are cut, Song said, the government should also reduce fiscal expenditures and avoid boosting the fiscal deficit.
An accompanying Weekly Summary of Macroeconomic Events includes analyses and assessments of the week's key domestic and international economic developments.
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[ICP License: 090027] IDC License:[B2-20040250] Advertising Business License:[京海工商广字第0407号] 京公网安备110105005607号
Copyright by Caijing. All Rights Reserved