Since the start of the year, news stories causing concern have appeared around the world.

 

The United States is seeing an increasing negative influence from the subprime crisis on its financial market. Stock markets around the world have seen dramatic ups and downs in the last week while the Chinese stock market has also fallen. Heavy snowstorms have hit many parts of China causing huge damage to the economy.

 

Many say the Chinese authorities should reconsider the tight monetary policy currently in effect.

 

Their concern is not baseless for the economic situation in and out of China does not allow for too much optimism. Capital markets around the world are stumbling. China and the US are also seeing a narrowed difference in their interest rates.

 

However, these facts are far from adequate for the Chinese authorities to change the tight monetary policy.

 

Many world market analysts believe the US economy is entering a recession because of the subprime crisis. But it is still too early to make this judgment.

 

Admittedly, the subprime crisis has hit the US economy badly, but its negative influence is unlikely to pull the US into recession.

 

The real serious problem in the US economy is the rapid devaluation of the dollar. The depreciation has lowered the purchasing power of individual consumers who buy commodities priced in US dollars. It has also driven up the prices of major commodities on the international market.

 

As a country whose imports exceed its exports every year, the US finds its imports much more expensive now and this could severely affect domestic consumption.

 

But the fundamentals of the US economy have not been changed, so it might be able to shrug off the subprime crisis as long as the US dollar stops its slide.

 

At the same time, the Chinese economy is still in high speed growth and it has been so for the past three decades. This growth momentum could carry on for next three decades because the Chinese economy still has great potential for further development.

 

China has a huge economic disparity among different regions and among different sectors. This disparity, long viewed as a disadvantage, could be turned into a force driving the economy forward under proper guidelines by the authorities.

 

The heavy snowstorms hitting China have caused huge financial losses. It has also affected the daily life and travel plans of a big portion of the country's population.

 

However, the damage is only temporary. The economy will quickly resume its normal track and pace once the weather changes.

 

In China, there has been overcapacity in many industrial sectors. Combined with the efforts from the governments at all levels, this overcapacity will help erase the negative influences posed by the natural disaster.

 

China's economic development has relied on urbanization and the boom in the property market after 2000. The two engines are not going to be changed by stock market fluctuations or snowstorms.

 

Figures from the National Bureau of Statistics (NBS) suggest that the business cycle index was 121.3 in December last year, while the ideal level should be 100. This hotter-than-normal status of the macro economy was maintained for several months last year.

 

The NBS estimates that China's GDP in 2007 will be 24.7 trillion yuan, 11.4 percent higher than 2006. This figure is much beyond the target of 8 percent. And it is the fifth year in a row that the Chinese economy has achieved double-digit growth.

 

Since July last year, China's exports have grown robustly, the foreign exchange reserve has kept on rising, new bank loans reached their annual ceiling months before year-end, and investment in fixed assets has stopped declining.

 

All these signs back one conclusion: the Chinese economy is overheating.

 

Although the official rise of the consumer price index (CPI) for 2007 was only 4.8 percent, the system for calculating the CPI is defective, the rise was not mirroring the true rise in prices for essential goods. If the authorities decide to loosen the monetary policy according to the 4.8 percent growth, it would be a misunderstanding of economic performance.

 

Despite the authorities' efforts to control price rises through administrative means, the prices might rise again this year, both on the international market and on the domestic market due a shortage of certain commodities caused by the snowstorms.

 

Therefore, if the Chinese central bank followed the US Federal Reserve and loosened its monetary policy, it would not only hinder efforts to prevent the economy from overheating, but also add more bubbles to the stock and property markets. It might even push the consumer price index even higher, or cause other unforeseeable damage.

 

The authorities should firmly stick to its tight monetary policy as it is essential to maintain the economic soundness of China under the prevailing conditions.

 

The author is a researcher with the Institute of Finance and Banking under Chinese Academy of Social Sciences

 

(China Daily January 31, 2008)