Puzzles of China’s Economy

China has to solve four problems to keep stable and fast economic growth in the year of 2011.

How will China’s economy go in 2011? This is a problem that decision-makers attach great importance to. Meanwhile, the scholars and economists also pay close attention to this issue. In an economic forum held by Fudan University, the scholars and economists had an overall analysis of the macro-economic policies since the financial crisis and made a forecast for China’s economy in the year of 2011.

The experts thought there would be four major problems for China’s economy. They also provide their own solutions.

One: Does inflation exist?

Yin Xingmin, deputy director of China Socialism Market Economy Institute of Fudan University thought that China would meet inflation in 2011 and 2012. His analysis was based on four points.

1.      From the relationship between the money stock and the income & price, the increasing rate of M2 is much higher than GDP in 2009 and 2010. Such a trend is reflected in the price level. CPI and PPI are still in the low level, which means that 2011 and 2013 will witness a continuous inflation.

2.      The inflation effect of monetary expansion indeed exists. The M2 in 2009 increased by 27.7% from a year before, while the income only had a 9.1% increase in the same period. This is attributed to be impact of money supply. The fast money supply increase must influence the fluctuations of income and price. Then have a look at M0, which refers to the circulating money. The growth rate of M0 in the first quarter of 2010 was 15.81%. The money supply was once again blamed for the high growth rate. Can China avoid the inflation in the next two years? No, because the money has been issued.

3.      What factors are influencing the variable money stock? Simply speaking, there is a lot of “money” in the economic life. Enterprises and individuals have easy access to various kinds of loans. They spend a lot of capital in buying rare commodities, gold and different kinds of assets. The drastic increase to the prices of commodities and assets lead to an overall inflation. Yin Xingmin called this “long-term excessive fluidity”.

This phenomenon will last in 2011 and 2012. The increasing prices mean that the increasing speed of money flow. The larger the amount of accumulated money supply is, the more excessive the fluidity becomes. The basic reason is the undue increase in the money supply, which lays a foundation for the inflation anticipation. The excessive money supply is a problem hard to solve.

The public anticipation for the inflation will level up and go through three changes from deposit to currency, from fixed-term to current term, from long-term to short-term. What measures should the central bank take? Yin Xingmin put forward two ways – increase the deposit rate and reduce the money supply. However, inflation can not be avoided even if the two measures are taken. When to increase the interest rate and how much should it be increased will have great influence over the fluidity of the financial market.

4.      The impact of the money supply keeps decreasing. According the theory of economic period, the recovery of economy in 2009 was due to the impact of money supply. Then can the monetary expansion keep such a high growth rate? The answer is no! The inflation is related with the undue increasing rate of the money supply. However, the increase of money supply can give a long-term power to economic growth.

Therefore, Yin Xingmin thought that the growth rate of China’s economic will keep decreasing in the next two years, because the expanding monetary policy will cause the hump-like changes as the principle goes. Generally speaking, the changes of money supply go with the GDP growth rate. The impact of the money is mainly blamed for the economic fluctuation. When the increase rate of money supply goes down, the economic growth rate will take a downward trend too. Yin Xingmin thought the loose monetary policy would lead to a higher inflation rate. Therefore he recommended tight monetary policy in 2011 and 2012.

Two: How to adjust economic growth pattern?

Chen Xuebinm standing director of Finance Research Academy of Fudan University, said: “China had to endure great stress of renminbi appreciation in 2010, which was caused by the USA. The USA tried to ally with some developed countries and big developing countries to cast stress over China. Can the appreciation of renminbi solve the problem of unbalanced trade for China? In my opinion, the root of the huge trade surplus of China is not resulted from the undervalued renminbi, but from the defect in China’s economic growth pattern. Presently what we need to do is accelerate the change of economic growth pattern instead of appreciating renminbi. The change should be conducted with supply and demand. The present primary task is to improve the residents’ income level.”

After the reform and opening up, China has gradually built an economic growth pattern featuring low salary, low consumption, lower welfare, high foreign reserve, high resource consumption and high pollution. Such a pattern is necessary at the beginning of reform and opening up, when China was short of capital and technology and only had enough labor force. But now, China, after 30 years’ development, should change the pattern.

The previous pattern forced the Chinese people to create commodities and assets and sell them to the foreigners. What if the foreigners run out of their money? China lends money to them so they can buy China’s commodities again. Such a circulation will run out of all the natural and labor resources of China in a dozen of years. Though Chinese people’s lives are bettered, they have to contribute more efforts. Previously, a man having a job can feed his whole family with three or four people. Now, two persons with a job sometimes can not meet the demand of a family. The increase in salary never catches up with one to price. Therefore, the economic pattern should be changed.

The key to changing the economic growth pattern is to boost the domestic demand. Though China has taken measures in changing the economic pattern, they have not done well in increasing the domestic demand. The main reason lies in the seriously undervalued labor force. Now it is necessary to increase the income of ordinary people by increasing the salary, increasing the agricultural products’ prices, controlling the house prices and consummating the social insurance. During this process, the reasonable appreciation of renminbi is acceptable.

Three: How to change the investment in fixed assets?

Yang Ping, head of Financing and Investment Research Office of the Macro Economic Research Institute, National Development and Reform Commission, said: “What about the investment in 2011. That year is the beginning of the ‘12^th Five-Year Period’ (2011-2015). It is also the second year after the financial crisis faded away. All in all, the year of 2011 is very important. The decision-makers attach great importance to the investment in 2011.”

Can the rate of national savings, which was high in the year of 2010, go downward in 2011? Against this background, the drastic decrease of investment in fixed assetments will have great influence upon the national economy. We can see the savings rate for the government departments is still high, which is attributed to the 4-trillion-yuan stimulus package, in 2008, the central government invested 104 billion yuan (USD 15.6 billion) in the fixed assets; in 2009 the investment was 503.8 billion yuan (USD 75.7 billion). In 2010, the investment climbed to 572.2 billion yuan (USD 85.9 billion). The growth rate was still high but much smaller than the one in 2009.

In addition to the central government’s investment, local governments of different places and the state ministries also have their own investment. In 2009 this investment was 908 billion yuan (USD 136.4 billion). In 2010 it increased to 992.7 billion yuan (USD 149.1 billion), with a much smaller growth compared with 2009.

For the property industry, which is very sensitive to capital, if the monetary policy has significant changes in 2011 or the policy for property industry remains unchanged, the investment in property industry should be careful in 2011. Though it is not certain whether the risk increases, the property industry in China is definitely going through a systematic change. The tax of the property development, the construction of “guaranteed houses” (the houses for the low-income earners) and the redefinition of the property market scope will change the pattern of property market fundamentally.

With the end of the four-trillion-yuan economic stimulus package, the investment in 2011 will go on a normal way. The economic situation and monetary and loan policies will be the main factors influence the investment in fixed assets. In addition, as the economic pattern change goes on, China will reduce its dependence on the foreign demand and establish the domestic demand as the more power for economic growth. The investment in fixed assets in 2011, according to Yang Ping’s forecast, will be the same with the one in 2010.

Four: How to regulate the local governments’ financing

Wang Yongqin, associate professor of Fudan University compared China’s economic to a paint which looks quite good from a long distance. Such a comparison can also be used to view into some issues about local governments’ financing. We know that China went through great economic development in the past 30 years, but take a close look at this and you will find that the financial system is far from consummation, so are the economic and government systems.

The debt problem in some places is very serious. Some local governments borrow money from here to pay the debt there. Such an unreasonable pattern makes the debt problems worse.

There are a lot financing channels for the local governments. They are divided into three kinds: a), gathering different projects together and lowering the transparency when lending loans; b), repeated mortgage and c), mortgaging different parts of the portfolio to different banks. This first method is hard to operate but is accompanied with great benefits. In the USA, the asset-backed securitization is based on the method of packing the assets sensitive to market changes into a big pile of less sensitive assets. This could promote the trade and improve the welfare. However, if it is not operated properly, a big hazard will happen, such as the US sub-prime debt crisis. The latter two ways make full use of the value of the pledges. The biggest pledge is the land. Mortgaging the land improves the financing ability of the local governments. However, this method violates the central government’s regulation about the land using, which has caused conflicts between central government and local governments.

Wang Yongqin thought it necessary to differentiate the two factors about local governments’ financing. The positive factor will improve the economic development while the bad one can accelerate the formation of bubbles. Different parts should be treated differently, said Wang. The western part, which just started the way of rising, could have less strict control. However, strict regulations are needed in the eastern part. The local governments in China should be taught how to use the financing channels more properly and efficiently.