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China's economy can be steered toward soft landing

By Yu Yongding (China Daily)
Updated: 2008-10-29 09:20

China still enjoys a generally smooth economic development even as the international financial tsunami continues to engulf the whole world and its aftermath is yet to unfold.

Since July last year, the country has been plagued by rising inflation because of an overheated economy, with the CPI increasing to 8.7 percent in February year-on-year. To bring the intractable inflation under control, the central government adopted a tight currency policy. As a result, the CPI has shown a downward tendency in the past two months. Coinciding with the declining CPI is the slowdown of the country's gross domestic product (GDP), investment and trade surplus.

This should not cause us excessive worries. As early as four years ago when the 11th Five-Year Plan was drafted, the central government set an explicit goal of realizing a basic import and export balance in foreign trade in 2010. The macro-control has also promoted the country's economic restructuring although it slowed down the fast-running economy to a certain degree.

The current economic slowdown is only normal in its long-term development track. Since the 1990s, the country has experienced two economic development cycles, in which different development speeds alternated.

The deteriorating US financial crisis has affected China's exporting environment, thus unavoidably curbing its economic growth. However, with a well-operating fiscal performance and an astronomical amount of foreign reserves, we should have full confidence to curb any possible serious slide in our economy and bring it to a soft landing.

The country should still stick to a restrictive financial policy aimed at curbing inflation. We have no need to excessively worry that such a policy might hamper the country's economic development, if it can maintain a growth of no lower than 9 percent.

There was once a prevailing opinion among some economists at home that the appreciation of the yuan, China's currency, was the main culprit behind its year-long flying inflation. This is in essence a misconception about the relationship between inflation and currency revaluation. It is common sense that currency appreciation always helps stem inflation. It was precisely the misconception that caused many people to strongly oppose the country's move to appreciate the yuan in 2003 and 2004.

The current inflation is caused not by an appreciated yuan, but by an overheated economy and external pricing impacts. It is an indisputable fact that the appreciation of China's renminbi lowered the prices of imported oil, soybean and iron ores, thus helping contain inflation.

Some people also think that expectations about the yuan's appreciation caused the inflow of a lot of international hot money, which, in their view, would result in an excess of capital fluidity. As a matter of fact, any abrupt and large or marginal appreciation of the yuan would preempt possible chances for international speculative capital to flow to China.

Also, it is inaccurate to attribute the inflow of hot money in the past years to people's expectations about an appreciated yuan. Driven by its pursuit of a bumper return, a lot of international capital flowed to the country's rosy property industry in 2005 and 2006 and to its bullish stock market in 2006 and last year.

It is for sure that no international hot money would come to China only for the meager profits gained through expectations of a 3 percent appreciation of the yuan. Also, with a set of workable capital monitoring and management systems in place, any speculative international capital can be completely kept away from China's door.

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