2018Shift to Prudent Monetary Policy

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The Central Economic Working Con- ference of 2010 was accompanied by a high CPI―5.1%. The National Bureau of Statistics released the macroeconomic data in advance on December 11th in 2010 for which the Bureau claimed they wanted to release the data soon afterwards the data was obtained. However, more people believed it was the ongoing Central Economic Working Conference that advanced the data release. Back to August 10th 2009, the cover story on time magazine was “Can China Save the World” with an illustration, where a chubby panda was pumping up the deflated earth with sagging world economy. In that month, China’s CPI saw a year-on-year drop of 1.2%, a negative growth in 7 consecutive months, with decline in prices of five commodities among the eight commodities for calculating CPI. Under the deflationary pressure, a shift in the macro policy, particularly the monetary policy seemed to be a fable. But one year later, the fable comes true. As the weathervane of the Central Economic Working Conference, the Conference of the Political Bureau of CPC Central Committee held on December 3rd in 2010 by convention set the tone for this year’s Central Economic Working Conference―to implement proactive fiscal policy and prudent monetary policy and to enhance the relevance, flexibility and effectiveness of macro regulation (“proactive and pru- dent, cautious and flexible” to be short). After having tried the moderately loose, to be exact, extremely loose monetary policy for three years, China’s policy makers are considering again the prudent policy. There were signs for inflation, which were perceived by Premier Wen Jiabao. “Last year was most difficult for economic development, while this year will be most complicated,” said Premier Wen when communicated with netizens prior to this year’s NPC and CPPCC. Afterwards, the housing price saw the sharpest rise and that outside the Beijing 5th ring road reached RMB 20,000, a shocking beginning for this year’s high commodity prices. In fact, as early as the fourth quarter of last year, many insiders expressed their concern about inflation. But the government have merely adopted anticipation management with no substantive changes in the monetary policy. The overall policy would not be changed, and small adjustments would be made in the growth rate of monetary supply and new credit scale in 2010, said Li Yang, Deputy President of the Chinese Academy of Social Sciences. For the figure itself, CPI is not that heartrending. During February to April of 2008, China’s CPI jumped more than 8% year on year for a third straight month, much higher than this year’s 5%. The stable pork price began to soar in April 2007, which concerned the whole country and imposed much more impact on people’s daily life than this year’s high-price garlic, bean and ginger. Some people have noted the nuance of the inflation in 2008 and 2010. Economist Chang Xiuze warned that before the inflation in 2007, China had implemented prudent monetary policy for ten years only with several adjustments; whereas in the wake of the 2008 global financial crisis, the Central Bank initiated the two-year “moderately loose” period and in 2009 increased the newly increased loans to RMB 9.5 trillion. In spite of adjustments in 2010, the aggregate credit scale was still nearing RMB 7.5 trillion during the first 11 months. The Central Bank has did pointed out the difference between the prudent policy of 2010 and ten years ago. “This year’s prudent policy is different from that of 2008. In 2008, the prudent policy is subject to changes, while the prudent policy here is an intermediate state, neither loose nor an abrupt stop,” Sheng Song, the new head of the Financial Survey and Statistics Department of the Central Bank explicitly showed in time for Prudent Monetary Policy carried in the financial times of mid November. Sheng’s opinion now seems in line with the message delivered by this year’s Central Economic Work- ing Conference―to prevent inflation yet sustain economic growth, which is the long-term goal and also a severe challenge for China. On the night when the Central Economic Working Conference opened, the Central Bank announced a 0.5 percentage points hike in the deposit-reserve ratio from December 20th, the third time for the Central Bank to lift the deposit reserve ratio in one month. The abandonment of raising interest rates―most direct to adjust money supply―indicates that the Central Bank is considering the prudent policy. All parties are weighing the degree of the prudent policy. “The prudent policy this time is to deal with the stable triangle of economic development, structural adjustment and inflation curbing. Therefore, the prudent policy is to stay between tight and loose extreme. In theory, the chance for tight and loose policy is equal, but I prefer neutral monetary policy, because the economy is now in development after having recovered,” Chang Xiuze analyzed. “Next year, the monetary policy tends to be slightly tight,” said Xia Bin, Member of the Monetary Policy Committee of the Central Bank and Director of the Research Institute of Finance of the State Council Development Research Center in an interview with the media. Xia also forecasted the money supply would grow by 15-16% in 2011. Anyway, one thing is for sure: the policy makers will be more prudent and even cautious for capital use, as the Central Economic Working Conference has made it clear that more credit funds will be input to the real economy, particularly SMEs along with projects concerning agriculture, rural areas and farmers. Prior to the Central Economic Working Conference, it was reported that the Conference would stick to a minimum 8% economic growth for 2011, while control CPI within 4%, breaking the former bottom line of 3%. Although this news remains to be proved in next year’s NPC and CPPCC, it can infer that the prudent policy, in the real sense for the policy makers, aims at economic growth rather that an abrupt slow down at the cost of small yet controllable inflation.