International | May 11 2006
By Chris Shaw (Tokyo)
The World Bank has released its quarterly update on the Chinese economy, the document containing some interesting observations in terms of the outlook for the economy and the resultant implications for policy.
Growth for the quarter of 10.2% surprised the bank (like most other forecasters) on the upside, driven by strong exports and increased investment. With the global economic outlook remaining positive, the bank expects strong growth will continue and it revised up its estimate to 9.5%, though as it points out this implies a slight slowing of growth in the second half of the year.
It is the bank’s comments about policy actions in response to the strong growth that are of interest, as it suggests the People’s Bank has more work to do to rebalance the economy’s growth, which would make it more sustainable over the longer-term.
In what will be music to the ears of US policymakers the bank suggests the Chinese should speed up the revaluation of their currency as such a move would have a number of benefits for the economy overall.
In its view, an increase would help prevent a recurrence of the build up of excess liquidity that could follow the recent decision to increase official interest rates. At the same time, it argues a stronger currency would help rebalance growth more towards consumption, as a stronger currency should result in a decline in the level of the current account surplus thanks to an adjustment in the import-export equation.
Looking further out, the bank suggests further structural reforms are necessary to achieve the rebalancing needed to improve the economy’s overall health. Such reforms would be significant in scope, as on the bank’s analysis there should be a shift in government spending from investment and into areas such as health and education. At the same time it suggests there should be further changes to the tax system, while the removal of many of the investment subsidies currently available would also assist in shifting some investment from manufacturing to services.
The bank is taking a cautious stance though, as in its view the People’s Bank must be careful in the mix of policies it introduces. It suggests this because it suspects there may actually be less overcapacity and overproduction within the Chinese economy than many are speculating. Also, on its numbers the rate of growth in credit and investment is lower than was the case before the introduction of previous macro controls, so significant changes to current macro controls are not required. Rather, it suggests the focus should turn to indirect measures such as monetary policy in a bid to remove some of the excess liquidity from the system.
It is also cautious because the current account surplus is far higher now than a few years ago, which is creating some trade tensions especially with the US. But as the bank points out, if moves are made to significantly tighten policy without some rebalancing being achieved there is the risk of aggravating the external balance situation, which would worsen an already complicated situation.
The bank’s conclusion is growth will continue to remain strong, but the achievement of long-term economic health requires further policy changes, so the actions of the People’s Bank need to be closely monitored.
