Keep it tight

No need for a shift in monetary policy in China

There are few countries in the world where double-digit rates of GDP growth would qualify as a cause for concern. However, China has become so used to supercharged rates of expansion that, despite GDP growth of 10.1% in the second quarter, panic is spreading over the state of the economy. Amid press reports of slowing sales of cars and other key consumer goods, of soaring costs for labour, materials and power, and of problems in the export sector, the lobby pressing the government to relax monetary policy has gathered strength. When top officials conducted a tour of China's coastal regions in person to assess the state of events on the ground in July, there was a widespread expectation that this was a prelude to a formal change in government priorities.

On the face of it, expectations were justified when pronouncements at the end of July, following a key government economic policy meeting, appeared to shift the priority from controlling inflation back to maintaining steady and fast development. This was accompanied by an adjustment in the export VAT rebate regime, which reversed some of the steps taken last year by increasing the rebates available to garment and apparel producers from 11% to 13%. The People's Bank of China (the central bank) is also reported to have increased the annual loan quota for 2008 by around 5%, instructing banks that the new funds should be channelled towards small and medium-sized enterprises (SMEs) and areas affected by the May earthquake in Sichuan. Some observers have also made much of the fact that the renminbi has actually fallen against the US dollar for much of the past month--weakening from around Rmb6.81:US$1 in mid-July to Rmb6.86:US$1 in early August. ...


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