Policy Tightening or Easing? Reveal Real Meaning of Stability vs Development in China

During the past Easter holiday, we received some queries from our readers about the Chinese economic outlook in 2012. It appears that many investors want to guess what policies Chinese Government will implement in this year, especially whether the nature of these policies should move toward tightening or easing.

In fact, there is no need to guess too much, because Beijing is running planned economy and Chinese Central Government is used to announce its major economic tasks for each year (just like what released for the last year: Top 10 Economic Tasks For 2011).

For this year 2012, five major economic tasks were already selected by the Chinese Government during its Central Economic Work Conference (CEWC) hold on 12-14 December 2011. These top 5 economic tasks were mainly intended to reinforce and improve macroeconomic control policies in order to ensure stable and relatively fast economic development in this year. Key actions include: Accurately master the intensity, focus and rhythm of macroeconomic control policies to well-organize relationship between economic structure, development speed, and price stability. Macroeconomic control policies shall focus especially on resolving social conflicts and preventing potential risks during economic development. Continue to implement proactive fiscal policy as well as prudent monetary policy etc. More detailed summary can be found here: Macroeconomic Regulation Policies in 2012.

It has been very clear from the meeting that the overall key tone of Chinese economic policies is to "Develop While Maintaining Stability".

The real meaning of "develop" should be: to make good use of opportunities from the current strategic development period, to achieve new progress in economic transformation and people's livelihood improvement, and to achieve new breakthroughs in opening-up and economic reform.

The real meaning of "stability" should be: to maintain basic stability of macroeconomic control policies, to keep general consumer price level stable, and to maintain overall social stability.

Therefore if you want to increase your accuracy when anticipating a policy tightening or easing, you have to fully understand the true meaning of "stable and relatively fast economic growth". You may also have to agree that even the official GDP target has been cut to +7.5% in 2012, +7.5% is still a very fast economic growth rate as compared to most countries elsewhere in the world.

As a result, owing to the 2012 transition in leadership within the CCP (Chinese Communist Party) and the uncertainties in global economy recovery, we would rather believe that stability should be a more important theme for China this year. That said, if the economy continues to grow relatively fast, a policy tightening can be expected to make the growth more sustainable and stable. However, maintaining stability does not always equate to a policy tightening at all. If the economy slow-down escalates, stability also means a policy easing to counter the downside risk. This should include a monetary policy easing such as cutting RRR (Reserve Requirement Ratio) of commercial banks.

Another similar example of monetary policy is about RMB (Renminbi) exchange rate. It is expected that the Chinese authorities would trend to maintain a "basically stable RMB currency exchange rate policy" in 2012. Although a RMB exchange rate reform is also important for continuous economic development, it should be assumed that the reform will be pushed forward step-by-step only when the Chinese authorities are satisfied with the outside forex market stability conditions. Such RMB exchange rate policy should counter the upside monetary risk to save Chinese exports as there is still a strong pressure on RMB appreciation.

After all, as the 2012 global economy outlook is relatively complicated, we shall always watch the changing environment more closely no matter there will be a policy tightening or easing in China to counter the corresponding economic upside or downside risk.