Friday, December 17, 2010

"Change" and "Stability" for 2011 Economy

This month Chinese leaders are discussing macroeconomic policies for 2011. The central economic work meeting concluded on December 12th and the Price Bureau held a meeting on December 15th to talk about price policies.

The two key words at the economic work meeting were "change" and "stability." "Change" represents the change in development mode the leadership is trying to engineer during the 12th five-year plan period which begins in 2011. "Stability" refers to keeping inflation under control.

The "change" in China's approach to economic growth means shifting from a laser-like focus on growth any way possible as fast as possible to a more balanced approach that narrows differences in income, shifts from direct government investment to guiding private investment, and promoting domestic demand and consumption. The plan is to use government subsidies, subsidized bank loans, establish special government funds and give tax cuts to induce companies to invest in projects that will benefit poor people, encourage small and medium enterprises, and raise incomes. Higher incomes are expected to increase domestic consumption and wean China off its reliance on exports and fixed investment for growth.

This most likely means more beneficial policies for agribusiness companies that are believed to help poor farmers. Trouble is, these inducements result in excess capacity, creating a whole new set of problems and chaos.

Meanwhile, the government is flustered over signs of inflation. There will be "prudent growth" in the money supply. Growth in the M2 measure of money supply is targeted to be 15%.

The price bureau meeting celebrated the government's success in keeping prices basically stable during the last 5-year period and also discussed the priorities of change and stability for the next 5-year period.

While the Chinese government says it is committed to an economy guided by the market and letting the market set prices, the government constantly intervenes to control and regulate prices. This is reflected in the price bureau meeting where officials set a long list of tasks for "comprehensive control measures" to maintain "basic stability of prices." Price stability is elevated to a key task for 2011.

Maintaining the supply of agricultural commodities is the first priority listed for 2011. Officials are supposed to promote production and distribution of farm products by raising minimum prices but also prevent poor people from being hit by rising food prices. Vegetable production and fertilizer are singled out as priorities.

Officials are to prepare price control measures, although nothing specific about what this means. Among the strategies are increasing reserves of key commodities and setting up price adjustment funds.

There is a lot of talk about stepping up price monitoring and early-warning systems. Yet, as pointed out in another blog posting this week the "price information center" web site has stopped posting price data on its web site this month.

There is no "early warning" about the pork market, for example. Private newsletters say hog markets are being hit by disease epidemics in a number of areas, farmers are killing hogs early and prices are starting to go down. This could affect pork prices in future prices as well (this happened last year), but the government says nothing about it.

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