'shorting China' for what?
- By Li Hong
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People's Daily, June 23, 2011
At a time of global economic uncertainty which is also spreading to China, it is normal to see a host of nay-sayers and skeptics rise to diminish this country's economic prospect. Lately, we have read headlines and pundits' opinion like "cracks" emerging in the world's second largest economy, the biggest bank debt crisis in 17 years incurred by China's local governments, and a "hard landing" to serve the country better than a "soft-landing".
Just don't weigh them too much, or lock them in the drawer. Whenever a tumult of voices erupts, one just needs to keep calm, refusing to be drawn to the verbal fray.
After a long spell of double-digit growth from 2003-2008, and a silky recovery in 2009 and 2010 following a hiccup brought by the giant U.S. financial system meltdown, China's policy-makers could be well assured of their ability to tackle any economic problems. The country has bountiful options stored to remove barricades and stones in its road to prosperity. Those who aspire to short China will prove to be wrong.
First, the economy has maintained ample momentum and is on track for another solid growth this year. There won't be a crash landing -- a scene we have witnessed in U.S. in 2008 and 2009 with the equity assets bleeding, labor market devastated and its economy grounded to a chilly standstill. The so-called "macro-control" policy put into place by Beijing since middle 2010 has worked, and the Chinese economy is geared for a “soft landing” of 9 percent expansion in 2011 -- an ideal growth rate that fits China's conditions and is largely sustainable.
China's GDP rose 9.7 percent in the first quarter, and is expected to grow by 9.5 percent in the second quarter. A precipitous slowdown to lower than 8 percent in the third and fourth quarters is fear-mongering.
Therefore, Beijing should be consistent in implementing the prudent monetary policy, steadfast in unwinding previous stimulus plan, and be resolute in tightening credit supply in order to put elevated inflation under check. Premier Wen Jiabao and his cabinet, including the central bankers, should bear in mind that people's anger with inflation has proved to be more incendiary-- endangering stability – than decelerated GDP growth, because it erodes their buying power and lowers their livelihood.
The widespread online demand for the central bank to raise interest rates, in addition to raising bank's required reserve ratios, should not be neglected.
And, to thwart the cascading inflows of overseas hot money to the country, which has exacerbated credit supply and inflation in China, the decision makers should consider drastically hiking the value of the yuan against major global currencies -- a quantitative one-off appreciation is a better policy option. Only after inflation is put under stern control – with core CPI rise retreating to 3 percent, Beijing could, gradually, lessen its monetary tightening to nourish healthy and solid growth.
Some seem seriously worried about the chilling effect of monetary tightening on China's equity prices. However, lowered home prices and a property sector that is devoid of Japan and America-style bubbles are healthier, and a boon for Chinese economy. And, the policy's impact on the stock market is genuinely negligible. (Last year, I wrote that even if the stocks went down by several hundred points because of tightening, the economy won't be harmed.)
Actually, Beijing is not clueless, facing the rising recovery uncertainty abroad. It has begun to give tax relief to tens of millions of Chinese lower and middle class families by reducing their personal income tax. Beijing should consider giving them fatter tax refunds to inspire domestic consumption, amid decreasing export demands from the Western countries.
And, Beijing needs to be prepared to reach deeper to its coffers, and spend more on roads, ports, bridges, tunnels, subways and high-speed railways – to spur economic growth. It has just allowed local governments to sell bonds to raise money for affordable housing projects, or public homes for rental. The move will rein in prices on commodity home market while meet the demand of the low-tier urban residents and migrant workers.
By allowing local municipalities to sell securities, the long-festering problem of local government debts – which I explained in my previous column – could also be addressed, removing a much-feared default crisis. Meanwhile, the local governments will be forced to be choosy in investing in future projects, as they have to be accountable for all the bondholders.
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