Against the backdrop of a subprime loan crisis in the United States, the future development of the global economy becomes increasingly unpredictable. With this scenario, how do we predict the development of China's economy in 2008? Shanghai Securities News recently interviewed Zhu Jianfang, Chief Economist with Beijing-based CITIC Securities, to find the answer.
The impacts of the U.S. subprime loan crisis on the global economy seem to be a fixture. Against this background, can we expect an optimistic year for China's economy in 2008?
Zhu: The global economy in 2008 will become more unpredictable, but its impacts on the Chinese economy are relatively limited. We are still confident of China's economic development in 2008 and the year's economic growth might hit 10.8 percent. The biggest impact of the bleak world economy on the Chinese economy may be a decline in exports, because of falling foreign demand. Therefore, we believe, from 2008, China's economic structure will change fundamentally and domestic demand is expected to become the leading force to drive economic growth. This will help to rid China of the imbalance of foreign and domestic trade and exert a decisive influence on China's macro economic regulation efforts.
Trade surplus and inflation came under the spotlight in China's economy during 2007. How can the impacts of these two areas on future macroeconomic operation be relieved and removed?
To remove the pressure brought by an imbalanced trade structure, it's important to pay more attention to the adjustment of the exchange rate rather than that of the interest rate. Based on the current situation, the rapid growth of trade surplus has led to a sharp increase in the renminbi equivalent of foreign exchange reserves and cash supplies, which has caused excess liquidity and overly fast investment in fixed assets. Inflation has therefore accelerated and prices of non-stock assets swelled. As a result, although the central bank has raised the interest rate five times and the deposit reserve ratio for commercial lenders 10 times in 2007, the result is not very good.
In this context, the macro economic policy in 2008 might target the exchange rate. Accelerating the renminbi appreciation may be used as a tool to curb inflation and also foreign trade surplus. The appreciation will cool down China's current economic growth, promote the revaluation of yuan-denominated assets, curb the influx of hot money and ease cost-push inflation. We expect to see that the local currency will appreciate at a faster pace. By the end of 2008, the exchange rate of U.S. dollar against the renminbi could reach 1:6.8.
Does this mean the pressure from inflation can be eradicated?
We believe China' inflation will see a moderate growth for some time.
Due to historical reasons, the prices of many resources are underestimated, such as water, electric power, coal, gas, capital and labor. While stimulating excessive investment and pushing the economy to the brink of a "fever," it's adding pressure to resources and environment. Thus, the readjustment of the factor price is inevitable. Of course, in the short run, the state will adopt measures like financial policies to control the pace of pricing reform, so as to prevent a sharp economic recession because of the sudden release of inflation pressure. This fact determines that inflation in the future will be "moderate and lasting."
China's consumer price index is expected to rise by 4.3-4.7 percent for 2007, and the growth is likely to range between 3.5 and 4 percent next year. Against this backdrop, the central bank might raise the interest rate three or four times in 2008. If another interest rate increase occurs within 2007, then 2008 may see two or three hikes.
After experiencing the panic of "economic fever," the market does not need to overly worry about possible economic slowdown. Actually, whether the economic growth slows down or not does matter, because China's accumulated consumption capability seems likely to release itself in 2008. Even if the overall economic growth slows down, it will not drop sharply, and besides we can expect a better quality of economic growth.