Policy

A Chinese Conference on Inflation


Every year, China's President and Premier convene the Central Economic Work Conference, a three-day conclave in Beijing where senior policymakers, including the heads of the major ministries and China's largest state enterprises, set strategy and goals for the next 12 months. Decisions reached at the conference can affect trade and the health of the global economy. This year's conference, expected to open Dec. 10, will focus on how quickly the Chinese economy can grow without overheating, according to Janet Zhang, a macroeconomist at Dragonomics Research & Advisory in Beijing.

Zhang says President Hu Jintao and Premier Wen Jiabao may aim for 8 percent growth next year, and set official targets of 4 percent inflation and 6.5 trillion yuan in new loans, down from 7.5 trillion this year.

During the conference, China is expected to announce the latest inflation figure, which a survey of Bloomberg economists predicts will be 4.7 percent, a three-year high. "We expect the [People's Bank of China] to hike benchmark interest rates around the time of the data release and tighten liquidity conditions," wrote Beijing-based UBS economist Wang Tao in a report on Dec. 2. The Politburo announced on Dec. 3 that it will move to a "prudent" or "stable" lending policy from a "moderately loose" one. "What to do about inflation will take on an absolutely key role," says Louis Kuijs, a World Bank economist in Beijing. One thing that probably will not be tackled is a major loosening of the yuan's peg to the dollar.

The decisions made at the conference will fuel the debate on China's ability to manage a soft landing after two years of stimulus. For the optimists, a combination of higher bank reserves, tighter lending quotas, and higher interest rates will contain inflation, which they say is largely confined to food prices. "The economy is running close to potential, and in our forecasts, will remain there for the next two years. In other words, China is not overheating," wrote Capital Economics analysts Mark Williams and Qinwei Wang in a Dec. 2 note.

Those who foresee a soft landing also believe China's economy is moving, albeit slowly, toward becoming more consumption-driven. A Bloomberg survey of economists expects a November gain of almost 19 percent for China's retail sales. "China is still the best consumption story in the world in terms of sales growth of most goods and services," says Andy Rothman, China macro strategist for CLSA Asia-Pacific Markets.

Others are less sanguine. Tsinghua University School of Economics and Management professor Patrick Chovanec says China is still dealing with the inflationary impact of 50-plus percent growth in money supply since the stimulus's launch, and will have trouble tightening up, Party pronouncements notwithstanding.

The abundance of cheap money has already driven up prices in assets such as luxury apartments, jade jewelry, and Chinese art. "Now this inflationary pressure is leaking out into the general economy," says Chovanec. He points out that the likely loan target for next year, although smaller than that of 2010, would still be over one and a half times the amount lent in 2008. "If anyone is printing money, it is China's central bank, not the U.S.," says Stephen Green, head of research for Greater China at Standard Chartered in Shanghai.

The government may also have trouble weaning itself off public spending. Recent reports by local media say China is mulling a massive new stimulus plan of as much as $1.5 trillion over the next five years in seven strategic industries. Even as the Politburo signaled tighter lending practices on Dec. 3, it stated that China will continue with "proactive fiscal policies."

China "is behind the curve" on reining in the monetary measures adopted during the global financial crisis, says Fred Hu, the former Goldman Sachs chief China economist, who has founded financial advisory firm Primavera Capital Group. "Policymakers have been complacent."

The bottom line: The Chinese government's Economic Work Conference in Bejing will set policy on growth, inflation, and bank lending for 2011.

Dexter_roberts
Roberts is Bloomberg Businessweek's Asia News Editor and China bureau chief. Follow him on Twitter @dtiffroberts.

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