2012 will be a year of political transition for China. Hu Jintao's administration is coming to a close, and will be replaced by that of Xi Jinping in October. Likewise, local governments will also see a reshuffling of offices as new bureaucrats take charge of the Chinese economy. At the same time, 2012 promises to be a hard year for the global economy, and so the current set of leaders will have to battle domestic and international problems with one foot out the door.
Chinese leaders face the joint pressures of slowing growth in emerging markets and instability in the US and Europe. At the same time, policymakers have to stimulate the economy just fast enough to create new urban jobs for migrant workers, but just slow enough to protect its citizens' wealth from inflation. The government has shifted its goals from aggressive economic restructuring to maintaining domestic stability. As a result, certain infrastructural projects may be delayed until 2013 when the global economy is (hopefully) more stable and China's new leaders have had a chance to settle behind their new desks.
Nowhere is this shift in tone more clear than in China’s most recent Central Economic Work Conference. The work conference is one of China’s most influential economic summits in which the country’s leaders meet to decide which direction economic policies will take in the following year. Taking a central role in the conference was Zhou Xiaochuan - Director of the People's Bank of China.
Today, January 3, 2012, the Chinese business and economic magazine "Century Weekly" published an interview with Zhou (original Chinese text here). The interview touched on topics such as inflation; adjustments to monetary policy; a free-moving interest rate; how much room the exchange rate has to drift; the opening of capital accounts and the question of making the RMB an international currency - all of which are challenges that the new administration will have to tackle in the new year. I have translated the interview below:
12-31-11 Interview with Zhou Xiaochuan
Caixin Media "Century Weekly”: Looking back on 2011, there were a few changes to macro policy made to suit changes in the economy. The year started with tight macro controls that were later fine tuned, and then the Central Economic Work Conference (CEWC) announced in December the government's new platform of "seeking progress through stability." How do you see the economy changing in 2012, and what policies will be chosen to match these changes?
Zhou Xiaochuan: The CEWC has set explicit macro policies and has considered the issues of preventing downward economic trends and controlling inflation. China faces a number of international issues including the European debt crisis, the uncertain state of the US economy, and slowing growth in emerging markets. If all of these issues intensify simultaneously, it will form a very negative environment outside of China. More importantly, the international economy is changing rapidly, and so China has to take some precautionary measures to guard against unstable growth abroad.
As for our domestic situation, China's local governments will be changing leaders as political terms end in 2012. China is still showing strong growth and has a lot of potential for further economic expansion. Commodity prices have taken a turn for the better, meaning that the issue of controlling inflation is not as pressing as it was in 2011. Of course, China also has its own points of instability. We haven't accumulated enough experience or data, for example, to know how recent real estate trends will impact the national economy.
In general, China needs to prepare for poor international economic conditions. It must also continue to put pressure on overheated commodity prices while reasonably managing inflationary expectations. China also still has the formidable task of restructuring its own economy. All of these issues still need to be addressed in our macro policies.
Caixin Media "Century Weekly": November data shows that CPI was only up 4.2% YoY for the month, which is a 1.3 percentage point decrease from October data and is also lower than the market's expectations. How do you view these changes in inflation?
Zhou Xiaochuan: The CEIC has reiterated that it wants to "maintain a steady level for commodity prices." This shows that our leaders are still worried about inflation.
China's goal for inflation for FY 2011 was around 4%, but they will be hard pressed to meet this goal. The final figure for the year will come in at around 5%. The second issue is more technical and has to do with monthly YoY data. This kind of data can give people false impressions, and so they need to do more work with the numbers before reaching conclusions. Since the financial crisis, data has been unstable, and this instability has caused a substantial base effect on YoY data. You need to account for the base effect on all monthly YoY data. On one hand, you can say that a shift from 5.5% to 4.2% means that efforts to control inflation have been successful so far. On the other hand, the CPI grew 1.1 percentage points between October and November 2010, creating a strong base effect. In order to push against inflation with the appropriate strength, you first need to have an accurate quantitative understanding of the situation. You cannot presume that numbers will fall again by 1.3 percentage points next month. I have always advocated the use of seasonally adjusted monthly data, as that kind of data is able to quickly reflect changes in the CPI. Anyway, we can see that we have had some success in controlling inflation and that things are moving in a positive direction, but we can't afford to suddenly drop our guard as a result.
Looking at the general trends of China's economic growth, we can see that China still has huge potential for urbanization. More people will move into cities, seeking to improve their livelihoods. This trend means that China still has a lot of room for major infrastructural projects nationwide, and it is up to the government to assume a role of leadership here. Government officials have a uniform desire to take care of their duties, take care of the economy, and build beautiful and comfortable cities. But this all takes money. It has been over 30 years since China opened its economy. During this time, there have been periods of deflation. During the Asian financial crisis, for example, we saw some negative growth in the CPI. Generally speaking, though, inflation has been a constant issue during these years. For this reason, it is easy for China's economy to exhibit hotter trends. Generally speaking, emerging markets tend to have a higher CPI than developed countries. This doesn't mean that China is currently facing risks of overheating, but it does mean that we can't let our guard down when it comes to inflation.
Caixin Media "Century Weekly": It's been two years and the CEWC is again taking precautions against economic downturn. Which macro policies will be readjusted?
Zhou Xiaochuan: Currency policies and financial stability policies need to be used to make adjustments in opposing ends of the economic cycle. For the most part, they have been incorporated into the framework of China's prudent macro policies. The conventional wisdom is to make knee-jerk adjustments at alternating ends of the economic cycle. When the economy slows, hit the gas. When inflation rises, hit the brakes. The CEWC specifically made mention of the fact that macro controls need to be more forward thinking. We need to start with a reasonable forecast and make measured adjustments and fine-tune our policies ahead of time.