Senior officials in Beijing have bluntly rejected claims that China is heading for a hard landing, as debate rages over the pressures bearing down on the economy. Economist Fan Gang, who sits on China’s monetary policy board, said that soaring inflation and a likely drag from a US slump would not derail growth.
But a major revalution of China’s currency , the yuan - in the manner of neighbouring Japan in the late 1980s – would imperil the economy, he warned. “China is still experiencing a soft landing rather than a hard landing,” Fan told Emerging Markets in a telephone interview this weekend. He added that China’s existing policies, including gradual currency appreciation, were aimed “just to prevent that kind of crisis – a big interruption in our growth.”
Fan argued: “If there’s too big a revaluation, there will be a recession.” China’s authorities wanted to avoid Japan’s fate.
“Japan is a good reference for this. In the late 1980s it had this kind of shock.”
His comments come as inflation in China pushes an 11-year high: consumer prices surged 8.3% in March on food and fuel costs, faster than the government’s full-year target of 4.8%. Meanwhile China’s explosive export growth has made it far more vulnerable to a fall in exports than it was during the 2001 global recession.
In an interview with Emerging Markets this weekend former IMF chief economist Ken Rogoff said: “China is still an emerging market, and emerging markets have historically always been vulnerable.” Rogoff has argued that the odds are “50:50” for a significant growth recession – at least one year of growth under 6% – in China over the next two years.
China’s exchange rate regime has led the authorities to flood the economy with renminbi, he said. Widespread money supply growth is one downside of the country’s $1.6 trillion accumulation of foreign currency reserves, he said.
“The financial, social and political problems are not easy to manage. When you’re handling that many problems simultaneously, stuff happens,” Rogoff added.
But China’s deputy finance minister Li Yong last night sharply dismissed Rogoff’s assessment. “I don’t know where [Rogoff] gets that from,” Li told Emerging Markets. Calls for a major one-off revaluation of the currency have increased in recent months. That “would help the inflation problem, the rebalancing problem, and the global current account surplus problem”, Morris Goldstein, China specialist at the Peterson Institute for International Economics, told Emerging Markets.
But Fan said that policy measures were aimed at forestalling a hard landing. “For a developing country like China you don’t want to have overheating too far, so you want to adopt policy measures to prevent crisis. That’s why – if we did a big revaluation – that would almost certainly guarantee a crisis,” Fan said.
His views reflect those of People’s Bank of China governor Zhou Xiaochuan, who, in a recent interview with Emerging Markets, ruled out any radical policy changes – including a substantial one-off revaluation of the renminbi – because of mounting uncertainties in the global economy.
“The problem is sometimes you don’t know [all the variables] which can also have an impact,” Zhou said, acknowledging that a rapidly changing external environment – including uncertainty over export demand from the US, Europe and Japan – rendered unfeasible a significant change in policy .
But Rogoff pointed out that while inflation remains the major economic challenge, “it’s going to be difficult for them to manage it through the exchange rate. The pass through takes years. Monetary policy is a very crude tool here.” Instead, the Harvard academic argued that China’s economy was now on the verge of reaping the effects of “a monetary policy that has been too soft for too long.”
“The number one question is how the system would respond to a crisis. But the internal challenges are huge,” said Rogoff.
At a meeting yesterday of central bankers in Basel, Switzerland, Zhou said he expected Chinese inflation to moderate as the seasonal impulse from lunar new year celebrations diminished.
“After the spring festival, including the second quarter ... the inflation rate, the CPI could decline. So we also estimated (that) April, May are probably (when) the data of CPI can be moderate,” he said.