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Policy Loosening is Better Late Than Never

It is official. China’s latest credit-tightening circle comes to an end.

For the first time since the country pressed the tightening button in October last year, Premier Wen Jiabao said this week that the government will fine-tune its economic policies in an appropriate manner.

He made the remarks during a two-day inspection tour of the Binhai New Area in the northern port city of Tianjin, during which he held talks with leading officials from Tianjin, Inner Mongolia autonomous region and the provinces of Jiangsu and Shandong. Earlier this month, Wen visited Zhejiang province, where a number of small companies pulled their shutters down because of mounting difficulties to get enough funds to stay afloat.

Apparently, Wen’s remarks are the official confirmation that the tightening policies will be loosened in one way or another. As Wen said, policymakers should be sensitive to signs of new problems and make decisive moves accordingly. The moves should be aimed at maintaining reasonable growth in bank lending, boosting structural tax reductions, giving more financial support to small- and medium-sized enterprises (SMEs) and projects that improve people’s well-being, and maintaining consistency and stability in export policies to keep exports balanced and growing steadily, the premier said, according to the Xinhua news agency.

We don’t know what the local officials said to Wen. But they must have complained, in a polite way maybe, about the central government-imposed credit tightening that has hampered local economies.

Clearly, Wen ascertained “signs of new problems” in the national economy during his inspection tours and meetings with local officials, coming to the conclusion that the austerity policies implemented mainly to fight rising inflation go too far. Indeed, Chinese real industries, export and SME sectors in particular, cannot bear the brunt of the too-harsh tightening policies.

While Wen’s pledge to fine-tune the policies is definitely good news to cash-strapped industries as well as the stock market, the loosening comes a bit late. As I argued in two previous articles ('China needs some policy easing sooner than later', published in EJ Insight on September 19; and 'Further interest rate hike redundant', published on June 10) China’s last interest rate increase was overdone. A delay in loosening the credit grip has hurt economic growth, which China must maintain at a relative fast pace to ensure employment and social stability.

In fact, the Chinese government is often slow in adjusting its macro-economic policies, missing the best timing to make an about-turn. This is mainly because Chinese policymakers tend to not adjust the policies until signs of “new problems” have become clear. In other words, they make polices mainly based on what has happened, instead of what will happen. That is why Chinese policies, more often than not, failed to catch up with the fast-changing economic conditions.

Since Wen now officially declares policy loosening, the question is: to what extent will the loosening be?

Judging from the premier's remarks, it won’t be very great. Wen said keeping consumer prices stable will remain the government’s top priority. This means that a certain degree of tightening will remain to contain inflation. The government is likely to quicken the pace of loosening only after consumer prices in the remainder of the year prove that inflation has been successfully checked.

The other question is: will the credit loosening also be extended to the property market?

Property prices in some parts of China have shown strong signs of correction, thanks to the government’s grip.

But earlier this month, top government officials vowed to keep controlling the property prices. It is very likely that the government will not loosen credit controls for the property market any time soon, as policymakers so far don’t think they need to boost the real estate industry to protect economic growth.

Politically speaking, they want property prices to stay stable – perfect, if prices go down, before two key events begin in March 2012, when the country’s top legislators and political advisers will meet.

Only when the economy shows strong signs of a deep slowdown, will the government loosen the controls on the property market.


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