How high will the dragon fly?

China is still fighting inflation and continuing its restrictive monetary policy. Growth rates are much lower than in the past 15 years. The economy has been struggling with this situation since the beginning of 2011. Recently the Chinese government started to loosen its ties little by little. This reminds me of the book China’s Megatrends, which describes the eight pillars of Chinese development. The fourth pillar, “Crossing the River by Feeling the Stones,” explains how China is trying to forge ahead with optimism towards an uncertain future. For example, China runs pilot projects and evaluates whether their next steps are likely to lead to success. If success is not particularly likely, they have no problem changing direction. This is how the Chinese government is currently behaving.

At present the Chinese government is taking significant steps to speed up growth. By taking short-term steps, the government hopes to maintain control of the inflation rate. On June 1, 2012, China Daily wrote, “New strategies intend to change longer-term economic structure.” Call it Beijing’s “Stimulus 2.0.” China is at an inflection point as its economic policy focus shifts to growth instead of inflation control.

Will this really guide China back to its former growth rates? In my opinion, growth will come slowly. The Chinese government’s steps will impact the following areas:

  1. Monetary easing

By mid-May, the central bank had lowered the RRR three times, most recently on May 12, and economists have forecast further cuts in the next few months. Large financial institutions’ RRR was lowered to 20 percent, while that for smaller banks fell to 16.5 percent. Economists differ on how much RRR cuts help growth. That banks can lend more does not mean that they will do so, immediately or in the longer term.

  1. Offering subsidies

On May 16, at a State Council executive meeting chaired by Wen, the central government decided to offer 36.3 billion yuan over the next year to subsidize the purchase of energy-efficient products. Of the total, 26.5 billion yuan will be targeted to home air-conditioners, flat screen televisions, refrigerators, washing machines and heaters. Another 2.2 billion yuan will go to LEDs and other energy-efficient lighting, 6 billion yuan for automobiles with engine capacities of 1.6 liters or less, and 1.6 billion yuan for high-performance motors. The subsidies, economists said, could generate as much as 450 billion yuan in domestic consumption. That sounds like a lot. But analysts said it’s a drop in the bucket for a 50 trillion yuan economy – the size of China’s GDP last year.

  1. Speeding investment

Moving at what the Chinese-language business press called a “markedly faster” speed, the government has green-lighted more investment in fixed assets – new factories and infrastructure. Since April the National Development and Reform Commission has approved four new airports or airport relocations and about 100 clean-energy projects.

  1. Building new homes

As of the end of April, the central government had authorized 148.3 billion yuan for the construction of subsidized urban housing. These apartments are a strategic part of Beijing’s efforts to control the real estate bubble while providing homes for low-income urban households.

  1. Cutting taxes
  2. Nurturing innovation

The State Council decided to accelerate the growth of the seven so-called strategic new industries: energy efficiency and environmental protection, information technology, bio-engineering, advanced equipment, new energy, new materials and alternative-fuel vehicles.

  1. Inviting capital

Allowing private investment into previously closed industries will make those sectors more competitive while helping the economy develop in a more balanced way. The ministries’ plans are still too vague and lack detail, critics said. But the plans could signal the start of a trend in which rules that actually implement the plans will be worked out by the central government and its agencies.

The above points a cited from:

This is an impressive stimulus package for the Chinese economy. The most positive sign is that China is implementing these efforts in accordance with its 12th five-year plan and with an awareness of sustainable development. Development of renewable energies, reduction of energy consumption, infrastructure improvements, and efforts to overcome social discrepancies by building homes for low-income households are guiding the country towards a sustainable future.

It is not certain that these steps will be sufficient, but Chinese officials are clearly stating, “This is our first step.” If these steps guide us towards the target, we will go further. If we do not achieve the expected results, we will have to try another way.

I am still impressed by the Chinese approach to developing this big country’s economy without a lot of struggles.

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