China economic policy steady for 2005

SINGAPORE, March 7 (UPI) -- With the National People's Congress in Beijing underway and key speeches by premier Wen Jiabao and others seniors officials, it is already clear that the motus operanti for China's economic policy over the coming months will remain 'steady as it goes.'

"Wen's speech did not signal significant departure from the past two-years' policies that put stability ahead and shift resources on the margin to areas that might threaten social stability,' noted Andy Xie, economist at Morgan Stanley.

"Overall, the government policy is still about redistributing income from the rich eastern provinces that account for 20 percent of the national population but 80 percent of exports to other areas," he added.

The government plans to trim its budget deficit to around 2 percent of GDP this year, after a 2.5 percent deficit last year, as it makes the transition to a neutral fiscal policy stance.

China's Finance Minister Jin Renqing said the new 'prudent fiscal policy', took into account economic changes.

Fiscal revenues for 'central and local budgets' are expected to grow 11 percent over the previous year, down from a 21.4 percent rise in 2004, as a reflection of a series of tax cuts and fees in rural areas.

Although the gap between farmers' incomes and city dwellers' has been narrowing as the result of recent government's policies (like increase grain prices through the inventory policy), the disparity remains significant. Plans included eliminating fees in 592 of China's poorest counties and scrapping taxes on livestock breeding.

Meanwhile, expenditures will grow by 13 percent, with military expenditures up 12.6 percent to $29.5 billion. Expenditures grew by 15.1 percent in 2004.

The government is also forecasting a mild slowdown in economic growth this year to 8 percent, after the 9.5 percent recorded in 2004. "The economy should grow rapidly, but not be allowed to overheat," Wen said.

The forecast slowing of GDP growth is consistent with slower forecast domestic demand (retail sales, investment) and external demand (a continued narrowing of the trade surplus), Tim Condon, economist at ING Financial Markets noted.

China's industrial production rose in January at the slowest pace since December 2001.

But CSFB chief economist for Asia Dong Tao noted that the fact that the 2005 growth target is set above the 7 percent target set last year, seemed to indicate Beijing was more tolerant of growth. "We think this will likely lead to a reacceleration in investment and rebounding demand," he wrote in a daily research note.

Wen said his focus will be on keeping inflation at 4 percent this year, from a peak of 5.3 percent last year. But inflationary pressure could emerge if commodities prices continue to rise, as they are priced in dollars, economists said.

In an effort to cool the economy, China's economic planner Ma Kai, head of the National Development and Reform Commission, announced growth targets in the broad money supply of 15 percent and growth target in fixed assets investment of 16 percent.

Economists said this was a clear signal the central government was going to get tougher on investment.

Fixed assets grew by nearly 27 percent in 2003 and 25.8 percent in 2004, so a slowdown to 16 percent growth will be a sharp deceleration.

Pulling investment off its peaks too quickly will impact on growth and job creation, but Wen appears to have decided that a clear signal needs to be sent out to the provinces that he is serious about calming investment growth down in 2005. What tools are to be used is still an open question, economists said.

Meanwhile, officials have continued to stress the currency peg against the U.S. dollar would remain for "a relatively long time," with Wen pledging to keep the yuan "stable."

However, Wen also said the authorities would "push forward the reform of the exchange rate determination mechanism step by step."

Most analysts expect the yuan to be re-peg against the U.S. dollar this year at a different level to ease pressure on the currency.

Officials are also leaving open the option of further tightening measures.

"On the macro front, Wen's speech recognized the need to maintain a tightening bias but did not hint at any major policy imitative to restrain investment demand," Xie said.

Xie believes that political pressure on local governments, as reflected in

Wen's warning on mindless pursuit of GDP growth with wasteful investments, is likely the most important tool in cooling the economy.

"If local governments heed the advice, the credit demand would slow and,

even with ample liquidity, money multiplier would decline to cool

demand," Xie said.