In an effort to avoid a bursting bubble and an over saturation of the market, the Chinese government will take steps to cool down its red-hot economy. Through restrictions on exports and a new emphasis on domestic consumption, China plans to sustain economic expansion. See the following article from Money Morning for more on this.
China will take steps to cool off its red-hot economy in the next five years largely by increasing domestic consumption and de-emphasizing exports, Premier Wen Jiabao announced in an online chat with the country’s citizens on Sunday.
Wen, China’s leading economic official, said the government’s official target for average gross domestic product (GDP) growth over the next five years will be reduced to 7% annually, down from a target of 7.5% in the past half decade.
China needs to slow economic growth to curb soaring food and housing prices and to restructure its economy, even as most developed economies around the globe struggle to sustain expansion.
"We want to put the emphasis of our work on the quality and the benefits of economic growth," Wen said. "We want the fruits of development to benefit the people."
Wen made his comments as the country prepares for the formal release of China’s next five-year economic plan at the annual meeting of its National People’s Congress that begins on March 5.
Even though Wen’s message was straightforward, many analysts feel the lower growth target is more of a symbolic gesture because China has blown through its stated target of 7.5% GDP growth for the last six years in a row. Growth reached 10.3% in 2010, making China the fastest-growing major economy in the world.
"No one will really have 7% as their target. Everyone’s going to be higher than that. [But] the message is that they want growth to slow down," Kenneth Jarrett, head of APCO Worldwide’s China consultancy, told The Telegraph.
Wen also pledged to curtail consumer price increases by reducing lending, boosting agricultural production, and punishing hoarding and price manipulation. Earlier this month, China accelerated its campaign against surging inflation by raising interest rates for the third time since mid-October.
Inflation in China rose to 4.9% in January from 4.6% in December. But those numbers exclude food prices, which are increasing at the alarming rate of 10%, according to figures released in January.
Wen acknowledged that China’s official rate of inflation doesn’t reflect the rising cost of food, which is making life difficult for hundreds of millions of Chinese people.
"Rapid price rises have affected the public and even social stability," Wen said in the online forum that was broadcast across all state media in China. "The Party and Government have always made a priority of keeping prices at a generally stable level."
Abundant foreign currency and grain reserves should be sufficient to curb inflation, he said.
That may mean China is considering increasing imports of grain and other foodstuffs to protect against price gains, Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole CIB, told Bloomberg.
The announcement fueled speculation among analysts that slower growth in China may put a damper on the recent surge in commodity prices, a sector that is largely being driven by demand from the country’s strong growth.
"It may cause some initial reaction that tempers some speculative demand for some commodities," Mark Kristoff, chief executive of Traxys Group, a New York-based commodities trading company, told The Journal.
But market participants are still skeptical that the Red Dragon can successfully curtail its GDP growth and consequently reduce the amount of raw materials it consumes every year.
Demand for agricultural products in China continues to remain strong despite efforts to cool its economy, which may temper the market’s reaction to the announcement. And even if China manages to achieve the desired 7% growth, the country is still likely to consume the equivalent of the steel production of Germany every year, Kristoff said.
"On balance, it will still be very significant annual consumption growth for raw materials. I don’t anticipate that will be a longstanding, depressing statement as relates to the markets in general," he said.
China’s Premier also decried the effects China’s blistering economic growth has had on the environment.
While China was chalking up big economic growth numbers over the last two decades, it also became the world’s biggest energy user and the largest emitter of greenhouse gases.
"We absolutely must not any longer sacrifice the environment for the sake of rapid and reckless roll-outs," he said. "We’ll never seek economic growth rate and big size at the price of environment."
Lead fumes from an illegal battery factory poisoned more than 200 children in Anhui province, hospitalizing 23 in January, according to Xinhua. And a leak of acid-laced water into the Ting River in July killed enough fish to feed 72,000 residents for a year, Bloomberg reported.
This article was republished with permission by Money Morning.