WEN AND HU MUST TAME THE GROWTH DRAGON / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

Wen and Hu must tame the growth dragon

Jonathan Fenby

Published: January 20 2011 14:16

China’s latest slew of data issued today show just how steep a challenge the authorities in Beijing face in bringing the economy under control. The basic problem is as much political as economic.

Until the country’s leadership gets to grips with unfinished structural business, reins in local governments, reforms the farm sector and brings big state-owned enterprises and economic lobbies to heel, the volatility seen ever since the start of the recovery from the 2008 downturn will continue.

The immediate reaction to the 9.8 per cent growth in the last quarter of 2010 was that an interest rate rise now looks inevitable, following the two hikes last year. The prospect of a new increase, which immediately depressed the Shanghai stock market, has been on the cards since the end of last year. But it will have little effect for two reasons – credit is allocated administratively in China not through the money markets, while any increase acceptable to the authorities will be too small to put a significant cap on the continuing strong impetus for growth. Equally, raising the reserve requirements for banks, which has been done seven times since the beginning of 2010, has had only a marginal effect.

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Having proclaimed a “prudent” monetary policy for 2011 in December, the government and the People’s Bank of China seem to have decided that the across-the-board quotas drawn up in previous years did not work too well in reining in credit in 2010. So they are going for selective curbs, targeting individual banks and sectors for attention.

Will that work? Only if the government is ready to be tougher with the big players and to see the closure of marginal smaller enterprises hit by a combination of rising wages and tighter credit.

To date, Wen Jiabao, China’s prime minister, has shown an aversion from adopting the kind of medicine for which his predecessor Zhu Rongji was famous.


The exuberance of the economy, be it in the property market, local government finance or infrastructure projects, has swamped the government’s attempts to induce more prudent behaviour. Hence the last quarter’s rise in growth to take the full-year increase to 10.3 per cent from 9.2 per cent in 2009. Hence the fresh upward trend in real estate prices. Hence indications from the PBoC that loans to local governments will not be seriously reduced this year. Hence huge new programmes taking shape, for example in urban transport.


But hence, also, the continuing pressure from inflation. The 4.6 per cent rise in the December consumer price index was below November’s 5.1 per cent but still does not look encouraging. Since three-quarters of the increase in the CPI is down to food and since the government rushed out a raft of measures to control food prices at the end of last year, a half-point drop is not very impressive.


With drought affecting winter wheat growing areas of central China, food price pressure is not going to abate and is underpinned by a long list of structural factors that the government has not properly addressed.


It may seem strange that a one-party regime finds it so hard to put the growth dragon back in the cave after letting it roam free over the last two years. But Mr Wen and Communist Party leader Hu Jintao, who is currently on a state visit to the US, operate by cautious consensus. If the December data are anything to go by, they are going to have to toughen up their act. Failure to do so and they risk being remembered as the men who, for fear of a hard landing, proved unable to control the factors driving China’s rise .


The writer is China director of the research service Trusted Sources

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Copyright The Financial Times Limited 2011