Chinese Government To Phase Out Macroeconomic
Controls
The Chinese government is planning to phase out its macroeconomic
controls, arguing that the Chinese economy has already
had a successful soft landing. The controls were introduced
earlier this year in an effort to cool rapidly growing
Chinese domestic demand.
A successful soft landing has been the main point of
focus for Chinese premier Wen Jiabao, who came to power
in 2003. As Chinese domestic demand first drove up commodity
prices and then retail prices worldwide and in China,
many economic observers have argued that the Chinese economy
is overheating and asked for a tightening
of liquidity in the Chinese economy.
The policy efforts have been unclear, as have been the
results. New private companies have had the most difficulty
obtaining cash for expansion, while many loss-making state-owned
enterprises have continued to be able to obtain cash at
the local and provincial levels. The central government
has only confronted local governments in several high-profile
cases, and some high-profile projects, especially in the
Shanghai area, have suspended construction until the policy
is loosened up.
Western and Japanese companies have continued to invest
in China, and foreign direct investment in China in 2003
was US$60 billion, in contrast to the US's $30 billion,
putting China's FDI at the number one position in the
world. This trend will continue in 2004. Because the Chinese
government controls do not affect non-Chinese companies,
the effect of the Chinese administrative controls have
been very lop-sided.
The strong growth of the Chinese economy has revealed
that the controls available to the Chinese central government
are limited. The economic tools available for controlling
overheating are relics from the socialist command economy,
but the economy is now a rapidly developing market economy.
In order to adapt, the Chinese financial sector will
need to change rapidly to reflect the needs of the new
market economy. It is likely that at the highest levels
of the government, there is a realization that intervention
with the wrong tools can do more harm than good. So, the
wisest policy is to declare victory, and let the economy
grow at its own pace, with a minimum of government intervention.
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