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Growing worries about recovery momentum

By Zhu Qiwen (China Daily)
Updated: 2009-08-03 07:46

The significantly increased volatility that China's stock markets witnessed last week underlined intensifying suspicion among investors that some stimulus measures like a loose monetary policy may have been implemented too successfully for these to succeed in the coming quarters.

If Chinese policymakers insist that a proactive fiscal policy and moderately easy monetary policy are crucial for sustained growth, they should work hard to convince the market of the sustainability of counter-crisis measures and thus the ongoing rebound.

Otherwise, hopes of a strong and sustained revival in the Chinese economy will be questioned amid growing fears over an about-face on credit supply. The benchmark Shanghai Composite Index plunged by nearly 8 percent at one point last Wednesday amid concerns over alleged government attempts to rein in a surge in bank lending, which has helped to push the index up by over 80 percent this year.

Though the strong rebound of the index in the two days following may indicate that this round of the bullish rally is not over yet, the sort of investor panic we have not seen this year spoke volumes about growing worries over an imminent cut in the supply of liquidity, which has so far considerably boosted share prices.

The combination of a government-led two-year 4-trillion-yuan stimulus package and record bank lending has, as policymakers expected, triggered a strong rebound in China's economy in the second quarter, pushing GDP 7.9 percent higher than a year ago.

Few now doubt if China can achieve the goal of 8 percent growth for the year. But more and more people are doubting the sustainability of the policy of monetary easing.

Beating the target of at least 5 trillion yuan in new lending for the year as a whole, Chinese banks have lent a record 7.37 trillion yuan in the first six months of this year.

Such incredible credit expansion has certainly helped a lot to shore up the economy, which sank to 6.1 percent in the first quarter, the slowest in about a decade.

Yet, meanwhile, it also caused apprehension about the quality of new loans as well as the inflationary pressure they will lead to.

The People's Bank of China, the country's central bank, repeatedly stressed last week its commitment to its moderately easy monetary policy, which is deemed necessary to maintain the momentum of the recovery.

In the second half of this year, the PBOC vowed to use a monetary policy mix to coordinate a "reasonable" credit structure based on market rules, and to ensure more loans to major infrastructure construction and technology innovation.

That sort of policy statement was aimed at allaying market panic. But, it does not seem to be enough to persuade investors that policymakers can continue a monetary policy as loose as it was in the past half year.

It is widely believed that the costs of unchecked credit expansion will only become too high if consumer price inflation accelerates or the rise of bad loans leads to a banking-sector crisis. It is also obvious that a sharp tightening of monetary policy any time soon could slow down infrastructure investment and dampen business confidence, which may have adverse effects on GDP growth.

At this critical conjuncture of economic recovery, Chinese policymakers can surely not afford to put the brake too early. The recent success of a proactive fiscal policy and moderately easy monetary policy in stoking growth does not mean the policy mix cannot be changed.

A key reason behind public worry about the current credit expansion is that there must be a limit to the turbo-charged investment growth. Investment already contributed 6.2 percentage points to the country's 7.1-percent GDP growth in the first half year. It is unreasonable to expect more bank lending for investment projects to further speed up the recovery.

Fortunately, the promising but not-fully-tapped consumer market leaves ample room for an even bigger stimulus to work its magic.

A proactive fiscal policy could mean more tax cuts or government subsidies for Chinese consumers. And, a moderately easy monetary policy should include greater consumer credit support and more convenient consumer finance.

If that is so, there really is not much to worry about in China's recovery momentum. Policymakers should just focus on pursuing further economic growth via diverting more money into the growth engine of domestic consumption.

(China Daily 08/03/2009 page4)