Effects of China’s Retrenchment Policy

There are observations that China will not raise interest rates to cool down its overheated economy. Analysis shows that the policy to suppress China’s overheated economy will have limited impact on Asian countries.

--Aiming to cut the Gordian knot

Chinese Premier Wen Jiabao repeatedly expressed recently that he will not solve over-investment problems with a “one knife cuts all” philosophy. Experts believe Premier Wen’s “one knife” refers to an increase in interest rates.

The Financial Times reported a Chinese financial officer as quoting that the People’s Bank of China, the country’s central bank, will first observe for few weeks the effect of administrative measures to curb over-investment and decided upon the issue of increasing interest rates.

The administrative measures to prevent over-investment include: 1) prohibition of selling agricultural land illegally to use for construction purposes, 2) an increase in paid-in-capital of business, 3) reinforcements in investigation of construction plans, and 4) banning of fresh loans in overheated industries and others.

Two weeks ago, Premier Wen Jiabao summoned local government authorities and stated that he would seek responsibility to whoever approves any reckless or overlapping investment in overheated areas.

Julius Caesar Parrenas, senior advisor at the Taiwan Institute of Economic Research, expects that "this will mostly affect sectors which supply construction materials like steel," and added, “China will not have a hard landing if its economic growth rate falls below 5 percent and thus, the impact on many Asian nations will be limited.”

However, Singapore-based regional economists Nizam Idris of the research house IDEAglobal pointed out that “although the possibility of a soft landing for the Chinese economy is rather high, contraction of the manufacturing sector will definitely cause an effect on Asian economy.”

--Signs of a cool down

The FT reports that in many parts of China, the influence of the government’s regulations is already having an effect. Construction plans are being halted or delayed in succession in places like Beijing and Shanghai. The construction industry alone took 33 percent of China’s fixed asset investment and 50 percent of its steel demand.

The 18-month rising steel pipe price is now facing a downward trend, and prices have fallen to 1,000 yuan per ton after March. The FT reported that in Beijing, the price per ton has fell from 4,050 yuan to 2,960 yuan, and that thousands of tons are piled up in warehouses.

The price of steel plate mainly used in cars and electronic goods has also dropped, and sales of cars are also decreasing. Sales of cars on credit in the first quarter of this year stopped at 10% of all sales, much less than the 40% of last year.

Meanwhile, electric power, railway, harbor and other industries that suffer from chronic shortages of supply and volume indicate that investments in these areas will be inactive for the meantime. China plans on building a power plant producing 42GW, an energy volume almost equivalent to that produced in all British power plants, in this year and next year, respectively,