Chinese Central Bank chief Zhou Xiaochuan last night sought to allay fears that China ’s economy is heading for a hard landing that would have dire repercussions for the global economy.
In an exclusive interview with Emerging Markets, Zhou said: “There is a high probability that we can avoid [a hard landing]. But there is uncertainty in the world.”
His comments came on the day that China raised interest rates for the third time in 11 months – the benchmark one year lending rate went up 0.27% to 6.39% – a move that underscored Zhou’s priority to curb inflation and the boom-bust cycle in asset prices.
China ’s burgeoning trade surplus, which hit $23.7 billion in February, a nine-fold increase from the previous month, has stoked fears of runaway inflation. China ’s annual inflation rate during the first two months of the year was 2.4%, compared to 1.5% in that period last year. The annual inflation target for 2007 is 3%.
Zhou, who was in Guatemala City to sign a memorandum of understanding last night with IDB president Luis Moreno, refused to be drawn on whether yesterday’s interest rate move would presage a revaluation of the yuan. Instead, he noted that the rise in consumer prices over the last four months is not indicative of “a medium term trend of rising inflation”.
There is “a delicate balance” between the welcome reduction in fixed asset investment caused by interest rate rises and the danger of fuelling China ’s trade surplus, Zhou said.
He emphasised the importance of boosting domestic consumption. “It is our consideration to continue to adjust our structural policy to encourage consumption”, he said. But he noted there is still uncertainty over whether it can expand. “ China is not very experienced in this regard,” he pointed out.
Zhou admitted that a sharp decline in the US dollar and a possible US recession could reduce Chinese exports to the US , and would be “negative for Chinese growth”. China could also lose some of the purchasing power parity of its foreign exchange reserves, he said.
Nevertheless, Zhou downplayed the significance of such a scenario for the Chinese economy. A decline in the value of the US dollar “would not impact much on the Chinese economy”.
The rate hike followed closely on the heels of the Chinese parliament’s approval on 16 March of legislation ensuring private property rights and ending preferential tax treatment for foreign firms. The bills had been pending since last year.
China is under pressure from both financial markets and the US administration to speed up structural reforms. US Treasury Secretary Henry Paulson, in a break from tradition, said at the Shanghai Futures Exchange on 9 March that China needs to deregulate its market, enact banking reform and develop a bond market. It was the first time a US spokesman had so directly addressed a call for change to Chinese officials.
As China ’s relationship with Latin America went up a gear last night, with the memorandum of understanding on Chinese membership of the IDB, Zhou said protectionism is a double-edged sword.
For China , rising protectionism “will give pressure for domestic adjustment that will increase reforms and boost domestic consumption”, but for the global economy – and in particular “small open economies” such as many in Latin America – it could be negative.
China ’s entry into the bank is basically a done deal: the US government is publicly backing it. China will become the third Asian nation in the bank, following Japan and South Korea , which joined in 2004.
China ’s first formal free-trade agreement in Latin America was signed with Chile last year. There have been overtures to sign agreements with other nations, but no concrete steps have been taken.