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2009-08-25

More than fune-tuning may be needed for China's economic policies

Comments on Yiping Huang “China needs to fine-tune policy now”, 24/08/2009, http://www.eastasiaforum.org/2009/08/24/china-needs-to-fine-tune-policy-now/

Inflationary concerns in China are more severe in China even than in the US, mainly due to equally loose monetary policies and strong fiscal stimulus, but quite different ways in both monetary and fiscal policy approaches or methods used.

Many people are concerned that asset bubbles in China are inflating, referring to both a rebounding equity market and a record breaking real property market. It appears that some of the huge increases in credits pumped to stimulate the real economy have gone to the asset markets. While it is not too much a concern at the moment of the stock market, given that is still half of its previous peak level, but the over-heated housing market is a real worry, given that the housing price to income ratio is much higher in China than in most countries and it increasing rapidly again.

Relatively speaking, China will have much more serious potential inflation pressure than the US, given the former's focus of its fiscal policy on fixed asset investments and the use of banking credits (by government direct control), both of which would be harder to withdraw.

Chairman Bernanke has outlined the US Fed’s tool kits available to withdraw from its current loose monetary position, it is unclear yet how China would do a similar job for its different monetary mechanism.

Yes, China appeared to have reduced the intensity of its loose monetary policy. But the key problem is how the monetary authority to reduce money supply after the huge and almost unprecedented increases in the first half of 2009. Also, as Huang pointed out, if the fiscal stimulus projects are longer term, then when the other parts of the economy picks up steam, how to maintain those projects without too much pressure on inflation.

I am not quite sure about the likely scenario of world commodity prices. The rebound of commodity prices or “soaring world commodity prices” as Huang put it, was largely not by the expectation of the recovery of the Western major economies – it was largely driven by what was happening in China and other developing economies to a small degree. Of course, the recovery of the major industrialised economies will add further pressure on commodity prices. There is no question about that.

I personally would not be too concerned with that "Many experts oppose macroeconomic policy adjustments", whether it is opposing government interventions in the first place, or withdrawing interventions when needed.

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