Rearranging the Deck Chairs on the SS Chinese Economy
“Starting from this year, we have lowered the target of economic growth,” Vice President Xi Jinping told the Irish Times in an interview published Saturday. “This will help reduce the pressure in terms of price, energy, resources and the environment.”
Xi, slated to become China’s next ruler at the end of this year, has in recent days also dismissed concerns about his country’s economy. As he told the Dublin paper, “The slowdown in China’s economic growth was, to a large extent, the result of our own macro-control measures.”
Feeling better? It’s not likely that Beijing in fact intended the economy to falter last month. Electricity consumption, the best indicator of Chinese economic activity, declined 7.5 percent. China’s aggregate financing, another good signal, collapsed, falling by almost half. New lending is the lowest it has been in five years.
Bellwether car sales? They tumbled 23.8 percent. Property prices were off for the fifth-straight month. Exports and imports were both down. Especially important, it appears that demand from consumers for foreign goods skidded. Foreign direct investment fell 0.3 percent, the third-straight month of decline, due largely to troubles in Europe.
What’s going up? Perhaps the most hopeful sign is that inflation last month jumped upwards, to 4.5 percent from December’s 4.1 percent. The spike is an indication of strong retail sales for everyday items in anticipation of the Lunar New Year holiday, which came early this year.
Of course, the generally weak results were in part due to the fact that there were four fewer workdays last month compared to January 2011, but these figures were much worse than analysts expected.
In an apparent response to the January numbers, the People’s Bank of China, the country’s central bank, announced Saturday that it was cutting the bank reserve-requirement ratio by 50 basis points effective the 24th, the second reduction since last November. There were six ratio increases last year. Many had expected the PBOC to drop the ratio before the Lunar New Year, but instead it used open-market operations to supply short-term funds to the banks in advance of the long break.
The central bank’s move is expected to make 400 billion yuan — about $63.5 billion — available for lending, but it’s not entirely clear that the big banks will repeat past behavior by lending all of the additional funds at their disposal. Even China’s exuberant bankers are starting to figure out what “ghost cities” are doing to their balance sheets.
In the meantime, Vice President Xi is projecting a confident image to the international community. “China’s economy will maintain stable growth,” he said on Friday while in Los Angeles on the last leg of his U.S. tour. “There will be no so-called hard landing.”
His upbeat words seem to reflect the thinking inside the central government. After all, the most that technocrats are willing to do is announce a second reduction in the reserve-requirement ratio. They are not taking more effective measures, like cutting interest rates or resorting to fiscal stimulus.
Why the inaction in face of January’s atrocious results? Some analysts say Beijing is concerned about reigniting inflation, and others believe the technocrats do not want to overshoot the mark like they did in 2008 and 2009, when they panicked and dumped far too much money into the economy. Perhaps there is simply a lack of consensus and the weak Premier Wen Jiabao will not step in to resolve differences. Moreover, the upcoming leadership transition looks like it is already inhibiting action. Whatever the reason, now it appears Beijing will merely continue to “fine tune” the economy, arranging the deck chairs.
So what is the government’s growth target for this year? Xi did not say, but government researchers have told Reuters the new goal is 7.5 percent. Beijing has always met its target by wide margins, so it looks like central technocrats are really expecting growth in the low 8s, down somewhat from 2011′s 9.2 percent. Yet after such a slow start this year, 7.5 percent growth will be hard to achieve. With an economy expanding in the low single digits — if it is growing at all — we would normally expect Beijing to take significant action.
So what is the worst economic indicator of all? The fact that Chinese officials are doing so little at this crucial moment.
Editor's Note: We have reproduced here in full text of "Rearranging the Deck Chairs on the SS Chinese Economy" by Gordon C. Chang from Forbes.com. We encourage you to visit the original.
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