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No major letup expected in tightening policy

By Xin Zhiming (China Daily)
Updated: 2008-07-19 08:51

Economists do not see major changes in existing measures that tighten monetary policy even as the Chinese economy cools down in the first half of the year.

"A fine-tuning of policies is possible," said Wei Weixian, an economist from the University of International Business and Economics. "But the overall orientation of those policies is unlikely to change."

Since last year, when the Chinese economy was witnessing growth of up to 11.9 percent, the authorities have resolutely tightened monetary policy to prevent the economy from overheating and to curb rising prices.

Lenders have subsequently been forced to tighten credit through interest rate and reserve requirement ratio hikes.

These moves have resulted in GDP growth slowing down to 10.1 percent in the second quarter, down from the first quarter, which saw a 10.6 percent growth in GDP.

Industrial output has also weakened, while corporate profitability dropped by a wide margin of 21.2 percentage points year-on-year in the first five months.

Meanwhile, export growth has slowed by 5.7 percentage points to 21.9 percent, making it difficult for traders and small export-oriented enterprises in the coastal regions, many of which have subsequently gone out of business.

Currently taking effect, tightening policies will almost certainly not be intensified, said Sun Lijian, economist with Fudan University.

"But it is not possible to substantially relax the policies either," he said.

At the same time, top national policymakers have visited major economic regions to sound out local opinion, while Zhejiang province - which hosts large numbers of capital intensive small enterprises - previously banned microcredit companies will be liberalized on a trial basis.

"Trade-related policies may change in the coming months, especially in the trade sector," said Wei, adding that the export rebate, which has been cut substantially or scrapped for some products, may be resumed as demand grows.

Fudan University's Sun Lijian said that inflationary pressure remains severe.

Indeed, the country's consumer inflation rose to 7.9 percent year-on-year in the first half of 2008, much higher than last year's 4.8 percent. It is expected to hover around 7 percent for this year.

Xu Xiaonian, senior economist with the China-Europe International Business College, opposes a relaxed macroeconomic regulation.

The decreased foreign demand as a result of the global economic slowdown is the major cause for Chinese exporters' woes, while the "defective financial system", which favors big companies, is to blame for small enterprises' thirst for capital, Xu wrote in a recent article. While loosened macroeconomic regulation will fuel inflation, it will not help traders and small enterprises, he said.