China�s Central Economic Work Conference concluded on Wednesday. The gathering, which brought together all of Beijing�s stakeholders on the matter, was the last major economic policy meeting before next year�s 18th Communist Party Congress, and observers were looking for evidence of a major shift away from the central government�s efforts to restrain growth.
China�s goal next year, we were told, will be �making progress while maintaining stability.� �Stability,� according to the Conference statement, �means to maintain basically steady macro-economic policy, relatively fast economic growth, stable consumer prices and social stability.�
The statement was more pro-growth than last year�s, but most observers just ignored Beijing�s bland words. As Zhou Hao of ANZ in Shanghai told Reuters, �We should not read too much into what the government has said, but pay more attention to what it will do.�
What Beijing has in fact been doing is taking steps to stimulate the economy. In November, the People�s Bank of China, the central bank, cut the reserve requirement ratio for 20 co-operative banks by a half point. The limited move was followed this month by half-point reductions in the ratio for both large and small banks. Not surprisingly, bank loans in November were up from forecasts, confirming that an easing policy is now in effect.
Yet the change is only minor. The oft-quoted Fan Gang, director of China�s National Economic Research Institute, yesterday called the current slowdown a �healthy correction.� Fan, who sometimes acts as the State Council�s unofficial spokesman, also warned us not to expect any big stimulus program. As he indicated, Beijing�s policymakers are satisfied with their general direction. In the words of Tim Condon of ING Bank in Singapore, decision-makers �are just staying the course.�
Should the course be changed? The Chinese economy was indeed racing too fast earlier this year, but now it is growing in low single digits or even contracting. These days, nothing�exports, consumption, industrial orders, property prices�is headed in the right direction. And the problems will inevitably get worse as the rest of the world stumbles.
The last time the global economy tumbled, Chinese leaders took action, decisively and quickly. In July 2008, the Politburo adopted measures intended to boost exports and in November of that year the State Council announced its massive stimulus plan. This time, Chinese leaders seem tentative.
There are three possible reasons for their relative inaction. First, they can be underestimating the severity of the situation. That�s unlikely, however. Chinese leaders can be accused of many things, but obliviousness�at least when it comes to their economy�is not one of them.
Second, they may realize that, despite the accelerating downturn, there is not much they can do. In response to the last downturn, they increased the country�s money supply beyond reasonable levels, thereby making monetary policy ineffective, and applied too much fiscal stimulus, burdening banks and lower-tier governments. They can implement another round of stimulus, but that would only make current problems�principally inflation and the property bubbles�only worse and buy them at most 24 months. As Fan Gang implied, perhaps they have decided that now is the time to take the medicine.
Third, Chinese leaders may be prevented from acting effectively by the country�s once-in-a-decade political transition, which formally begins next fall and continues for perhaps two years. Unlike 2008, when the Communist Party and central government moved fast, the current paralysis at the apex of Beijing means that technocrats can now adopt only modest and inadequate steps.
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