Stimulus and Strategy

By LAN XINZHEN

Stimulus and Strategy

By LAN XINZHEN

Officials and experts discuss obstacles and solutions in China’s economic growth

China may have impressed the world with its rapid recovery that helped lead the global economy out of the financial storm, but now economists with a growing fear of imminent inflation are calling for a gradual exit from the country’s massive stimulus plan.

Still, whether, when and how China should withdraw these incentives has become an intricate issue for the Chinese Government.

Against this backdrop, officials from China’s financial supervisory body met experts and scholars with related international organizations to diagnose feverish fnancial topics and economic growth at the China Finance Summit 2010 in Beijing on May 27-28.

Obstacles

Although, optimistic about China’s economic prospects, participants expressed concerns over the negative aspects of the world recovery.

On the macroeconomic front, China faces two challenges: growing inflation sentiment accompanying the country’s overheated growth and the crisis sweeping Europe, said Ha Jiming, chief economist of China International Capital Corp. Ltd.

While the European debt crisis is a strictly external issue, economic overheating and inflation in China are more controllable, especially after a series of macro-control measures were introduced in mid-April.

The fallout from the euro-zone debt crisis, Ha said, will affect China and the world economy in four ways: a depreciating euro will inevitably lead to an appreciating yuan, hindering China’s exports to Europe; fiscal austerity measures in some European countries will affect demand for Chinese products; financial indicators showing signs of credit and monetary tightening worldwide are reminiscent of the scenario before Lehman Brothers’ collapse; and the crisis may also affect the economic growth of China’s large trade partners and hence stifle China’s exports and imports, he said.

LOW-CARBON ENDEAVOR: The first environment equities exchange in northeast China—the eighth nationwide—opens in Dalian on June 2, 2010. The exchange attempts to promote energy saving, emission reduction and the development of a low-carbon economy

The euro’s depreciation against U.S. and Japanese currencies, for instance, will slow down U.S. and Japanese export growth and cause a ripple effect throughout China’s export industry, he said.

Japan, the United States and the EU are China’s top three trade partners.

And as Greek sovereign debt woes spread to involve more European countries and aggregate uncertainties in global financial and economic prospects, factors of uncertainty affecting the steady development of China’s capital market have increased, said Liu Xinhua, Vice Chairman of China Securities Regulatory Commission (CSRC). The CSRC is on alert as Europe’s debt crisis evolves and will deploy timely measures to cushion the impact if necessary.

At the same time, the CSRC is devoted to improving the market system and reinforcing supervision to ensure the smooth and sound development of China’s capital market, Liu said.

China also faces a stern test with its economic structure adjustment, said Gong Fangxiong, CEO of JP Morgan Chase Pacifc.

Now, the Chinese Government is accelerating economic structural adjustments and transforming the country’s economic growth pattern in the wake of the fnancial crisis. It has also urged other countries to rethink problems within their own economies.

Business reengineering and innovation in the fnancial sector will accompany China’s pursuit of green growth, said Gong.

While the global recession will continue for some time, China remains steadfast in its commitment to following a consumptionand service-driven growth pattern instead of the three-decade-old investment- and export-propelled growth model.

And a flourishing private economy will help expand domestic consumption and boost the service sector, Gong said.

The reform of China’s fnancial sector, fnancial innovations, in particular, will help address bottlenecks to private businesses’ fnancing.

China’s ability to attain the goal for its economic growth pattern transformation hinges on the further development, breakthrough and innovation in the country’s overall capital market, Gong said.

These efforts will help diversify fnancing channels and enlarge the capital pool for the market, and will especially provide a fnancing platform for the development ofsmall private businesses, Gong said.

Solution

The world has witnessed a surge of enthusiasm for low-carbon economic growth after the global financial crisis, which has fueled the development of carbon finance, defned as fnancial services supporting lowcarbon economic development, said Deng Gang, Senior Manager of Credit Risk with Huaxia Bank.

This genre of fnance enjoys great potential for development as countries, major developed countries, in particular, have favored the low-carbon concept in their massive economic incentives in order to win competitive edges in the next round of global economic growth, Deng said.

The United States, slated to double production of renewable energies in three years, has enacted strict new vehicle emission standards and built new smart grids. The EU adopted a wide-ranging package on climate change, known as the “20-20-20” targets: a 20-percent cut in emission of greenhouse gases by 2020, compared with 1990 levels; a 20-percent increase in the share of renewable energies in the energy mix; and a 20-percent cut in energy consumption. Japan plans to rank frst in the world in terms of promoting solar energy, renewable energies and ecofriendly vehicles by 2020.

China is no exception. It is undergoing a crucial economic transformation, cutting its reliance on energy-intense industries and switching to energy-efficient industries with high value added. This will create a new growth engine and ensure the sustainable development for the Chinese economy, said Deng. Enormous demands for low-carbon products will be generated during the transformation, which in turn will promote production process reengineering, and help change people’s lifestyles and upgrade services and products.

Carbon finance will develop mainly in four areas: low-carbon industries, lowcarbon energies, low-carbon technologies and carbon trading, said Deng.

Low-carbon industries include upgraded traditional industries, such as iron and steel and construction, and emerging industries, such as those involving smart grids, and carbon capturing and storing.

Countries worldwide have come to embrace the importance of clean energy as reserves of traditional fossil energies, such as coal, petroleum and natural gas, diminish.

Investments in clean energies worldwide reached $115 billion and are predicted to reach $450 billion by 2012 and exceed $600 billion by 2020.

In the future, low-carbon technologies will be developed to serve both traditional sectors and emerging industries. The carbon trading market is expected to exceed the global oil market, with a value of $3.5 trillion by 2020.

Green credit is currently the major form of carbon finance for domestic commercial banks, in the absence of a mature carbon trading system and platform in China, said Lian Ping, chief economist of the Bank of Communications.

While following the principle of green credit, banks increase credit for the development of new energy and emissionreduction technologies, but cut credit to energy-intense industries and industries with overcapacities.

Lian suggested commercial banks develop services and products to promote lowcarbon production and low-carbon lifestyles, such as green car loans and green mortgages for individuals.

“Through carbon fnancing, commercial banks can help promote these green technologies and assist with their evolution,” Lian said.

GREEN PRIORITY: Storeowners in the Yiwu marketplace of small commodities in Zhejiang Province offer customers a wide selection of green and eco-friendly commodities, such as energy-efficient light bulbs and bamboo housewares, during the World Expo in Shanghai

Indicators of Economic Uncertainty

Inflation: China’s consumer price index, a gauge of inflation, rose 1.5 percent in January and 2.8 percent in April year on year, close to the full-year target of 3 percent.

Liquidity: China unleashed a record-high 10 trillion yuan ($1.4 trillion) in new loans in 2009, increasing nearly 200 percent from the previous year. New loans will increase at a comparatively high rate this year, which is expected to be lower than last year’s. Excess liquidity will fuel infation in the economy and pose a threat to fnancial stability.

Property market bubble: Housing prices have risen steeply, making the desire of many Chinese to own an apartment an unreachable dream. While housing prices are usually 2 to 5.5 times the average income of urban residents in developed countries, and a rational ratio for developing countries is 3 to 6 times, housing prices in China stand at more than 15 times the average income of urban residents. The prices even exceeded 50 times that of urban incomes in Shanghai and Beijing.

Local governments’ debts: New loans to local governments stood at 3.05 trillion yuan ($446.5 billion) last year, accounting for 34.5 percent of all new loans. The yearend loan balance rose to 7.38 trillion yuan ($1.08 trillion) at local government fnance platforms, up 70.4 percent year on year, accounting for 20.4 percent of the country’s total loan balance in 2009. Economists have expressed worries that more than $1 trillion of local governments’ debts could put a dent in China’s back-on-track economic growth.