Macro controls face test amid global slowdown, domestic inflation

BEIJING, April 2 (Xinhua) -- Economists around the world have agreed that China's decision makers face a tricky situation this year as they attempt to maintain sound economic growth. Many of these same analysts have cut China's growth forecasts in recent weeks to reflect weak global demand.

The unfolding global credit crisis that began with problems in the U.S. subprime sector has led to global slowdown just as China faces increasing domestic inflationary pressure, they said.

On Wednesday, the Asian Development Bank lowered its 2008 forecast for China's economic growth to 10 percent from 10.8 percent. That revision came a day after the World Bank cut its 2008 forecast for China by 0.2 percentage points to 9.4 percent --its second reduction in as many months.

And less than a week ago, the United Nations Economic and Social Commission for Asia and the Pacific said in a report that China's economic growth would decelerate in 2008 because of slowing exports and the government's cooling measures.

Investment banks including Goldman Sachs and China International Capital Corp. have also agreed that growth would be lower, indicating rising concerns over the impact of slower world demand and and rising domestic inflation.

"The continued global slowdown under the impact of the U.S. credit crisis in the past two months was the major reason behind our further cut to China's forecast economic growth," said Louis Kuijs, a senior economist with the World Bank. The bank cut its 2008 China growth forecast from 10.8 percent to 9.6 percent just two months ago.

"The Chinese economy is faced with a complicated mix this year," Kuijs said. The U.S. financial turmoil and the ensuing global slowdown, rising international energy, industrial materials and food prices, and domestic inflationary pressure were major risks to the Chinese economy, he said.

Chinese Premier Wen Jiabao admitted at a press conference last month: "This year might be the most difficult one for the Chinese economy. There are many unpredictable factors at home and abroad, so decision-making will be very difficult."

Kuijs pointed out that the expansion-oriented policies needed to deal with weak external demand due to the credit crisis and the tightening policies needed to fight domestic inflation were "contradictory" to each other.

"This would make China's macroeconomic controls more complicated, and the art and competence of the government's macro control efforts would be tested," he said.

"Whether decision makers can accurately take the pulse of developments and changes in the domestic and world economies could be vital," said Wang Qing, Morgan Stanley's chief economist for greater China.

The impact of the credit crisis has continued to unfold and it's still unclear how it will play out. The World Bank said in a report on Tuesday that the damage caused by the U.S. financial turmoil to the global economy and to trade and capital flows was highly uncertain.

China's rising inflation rate, however, was not expected to ease for March or the entire first quarter. Inflation figures are to be released in mid-April. The consumer price index rose to nearly a 12-year high of 7.1 percent and 8.7 percent in January and February, respectively.

The government would have to address three issues: imbalances between domestic and external demand, mounting energy and environmental pressures and widening urban-rural income gaps, in order to achieve an economic soft landing this year, said Zhuang Jian, a senior economist with the Asian Development Bank mission in China.

"China needs to focus on expanding domestic consumption to avoid an economic fall-off," Zhuang said.

However, economists also agreed that the driving forces of China's economy, like investment and consumption, would remain robust this year despite the slowdown.

"The overall steady economic situation would offer much 'flexibility' for the country to coordinate its tight monetary policy and prudent fiscal policy," Kuijs said.

CHINA'S ACTIONS SO FAR

China said it would try to keep its economic growth at 8 percent with inflation at about 4.8 percent this year, according to targets set by the cabinet, or State Council.

The People's Bank of China (PBOC), the central bank, said late last month that the country would maintain its tight monetary policy, which would be adjusted in response to changes in the domestic and world economies.

The central bank raised the bank reserve requirement ratio twice so far this year. It also drained 3.6 trillion yuan (514.3 billion U.S. dollars) in open market operations in the first quarter, in an apparent drive to absorb excess liquidity.

The government would continue to improve macro controls with a prudent fiscal policy, a tight monetary policy and efforts to curb rising prices, the State Council said in its latest bulletin on key tasks for 2008.

It also pledged to increase investment in agriculture, boost economic restructuring and improve people's living standards.

The country had also rolled out a series of measures to fight inflation after China's government was reshuffled last month. Among the latest such moves were increased farm subsidies to boost production and curb grain price hikes.