China’s Changed Policy

China’s ruling Communist party wrapped up its most important economic meeting of the year with an agreement to focus on maintaining fast economic growth in the midst of what it described as an “extremely grim and complicated” global outlook. The annual three-day Central Economic Work Conference for top Communist officials sets policy for the coming year and this meeting clearly signalled that the leaders of the world’s second-largest economy are concerned about a slowdown in growth.

—-At the same conference last year, China’s leaders explicitly named taming inflation as the key policy goal for 2011. Financial Times.

Largely lost in the run up to the Christmas and New Year partying season, was a major economic policy change in China. Faced with a slowing domestic economy and falling orders from austerity wracked Europe, China’s leading customer, China’s economic policy makers switched from inflation fighting to promoting growth in their economy. The foot comes off the brake and presses instead on the accelerator. In a still heavily command economy, that means the banks and the shadow banking system are back in the business of lending again and back in the business of finding projects to promote.  This might have big implications for the level of REE exports this year.

While many, if not most of the new loans will go into real estate projects, China’s domestic auto industry has just been ordered to step up the pace of electric vehicle development. China had also previously announced a stepped up program for onshore and offshore wind turbine power production.  By mid-year the probability is high that we will be seeing a new Chinese domestic boom somewhat similar to 2009s response to the bust that followed the Lehman collapse.  To support that new boom, China may not really care if its REE export targets are fulfilled, well aware that stock piling on any unused quota will help support part of the new economic policy.

Below, how People’s Daily Online rather understated the news compared to the FT.

Economic roadmap eyes stability
(Global Times)  December 15, 2011
China’s economic objective in 2012 will be to seek relatively fast growth while maintaining stable consumer prices, said a government statement issued yesterday, wrapping up the three-day central economic work conference.

“The theme of next year’s economic and social development is to make progress while maintaining stability, which means to maintain basically steady macro-economic policy, relatively fast economic growth, stable consumer prices and social stability,” the statement said.

The country will preset or fine-tune monetary policy according to changes in economic development, harness multiple monetary policy tools and maintain a “reasonable increase” in money and credit supply.

It will deepen interest and exchange rate formation mechanism reforms, with the exchange rate of the yuan to be kept “basically stable.”

Another probable consequence of the policy change, China will hold down the appreciation in the Yuan, if not seek to lower it. The EU via the Euro, is now effectively devaluing against the world. China like Switzerland, might seek to limit the Yuan’s upward movement. The changed policy is too new to have had any effect yet and with China just about to embark on the 10 day China Spring Festival running up to the Lunar New Year on January 23rd,  we probably won’t see much change in January, but command economies never get “to push on a string”.  Wisely or not, they always push on a lever. With FX reserves of well over 3 trillion, mostly in rising US dollars, China’s economic team has a lot of room to let the economy fly.

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