China's Rate Hike and Fight Against Inflation: Part Two

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In 2011, the big challenge facing China involves moving ahead meaningfully to abandon its extreme economic stimulation policy without choking off the economy in the process. The housing market is a case in point.

Last year, Chinese banks had opened their lending floodgates wide to help stimulate the domestic economy, granting new loans worth a total of around 9,600 billion Renminbi. By way of comparison, the average new lending volume in the period between 2000 and 2009 came in at somewhere in the region of RMB 3,000 billion a year. Although the expansion in lending has indeed slowed this year, the volume of new loans granted will likely once again continue well above the long-term average of around RMB 8,000 billion. Various estimates still put next year’s lending at RMB 7,500 billion or more.

As we embark on a New Year, China has embarked on a new Five-Year Plan — interestingly, the emphasis has changed. Previous plans (and the current 11th is no exception) were focused on growth at all costs. Specifically, a doubling of GDP within a ten-year period no longer appears part of the new plan with the focus more on economic, social and ecological sustainability. Growth will still be rapid; indeed, will have to be rapid in order to satisfy the social criteria. Expectations remain high yet that growth could hit at ‘only’  7-8 percent rather than the unsustainable 10+ percent of recent years. There are so many factors driving inflationary pressures in China that Beijing has a major task in cooling the pressures without adversely impacting the growth throwing baby out with the bathwater, so to speak. Bank lending, interest rates and the exchange rate will all play a part, as will moves to curb certain industrial sectors such as high energy users and dissuade “unattractive exports” such as aluminum, viewed as  exporting energy. Even so, massive investment will still flow into infrastructure projects such as electrification and rail, and low-cost housing for the poor, all requiring large amounts of copper and steel. According to one report, the twelfth five-year plan requires the government to invest RMB 400 billion per year on average into power grid expansion.

The extent to which this balancing act achieves success will determine the ongoing growth China will enjoy. Almost certainly it will be lower than during the last five-year plan if for no other reason than a desperate need to control rising inflation — not just in China, but in the region. Even so, for the second-largest economy in the world, even 7-8 percent growth would make for a significant percentage of global growth and would ensure that China’s dominance in the metals markets continues.

–Stuart Burns

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