China Economy-----in Queer Street?

Recent statistics states a slowdown in China’s economy; the quarterly economic growth suffers a slight decrease from 10.4% in 2010 to 9.2% in 2011, due to China’s macro-control measures. Such decline may have negative impact on the external and domestic investment demand to some extent.

When addressed whether the slowdown in China’s economy may postpone the global economic recovery, Chinese vice-president Jinping, Xi responds this from “Irish Times” (February 18, 2012) during his visit to Ireland last week.

As he said

“Starting from this year, we have lowered the target of economic growth. This will help reduce the pressure in terms of price, energy, resources and the environment. It will also help us accelerate the shift in growth model and increase the quality and efficiency of economic development.”

From Mr XI’s statement, is this supposed that China intends intentionally interested in the slowdown of the economy growth??

I am quite confused. For example, in the investment-intensive,a leading indicater economic power consumption of the whole society decreases year-on-year by 7.5%; alternatively, Chinese society total financing slumps sharply, reduced by nearly 50%, the new lending and loan scale in January fell to its lowest level in five years. In another hand, the inflation rate increased significantly from 4.1% to 4.5% since last December.

In response to the reports in January, Chinese central bank on February 19th, 2012 decided to lower bank deposit reserve ratio by 0.5%, implemented from Feb 24, 2012. This claim is expected to release 400 billion Yuan (about 40 billion sterling) and aimed at enlarging the funds available to banks for lending, for instance, high leveraged investment banks can make more disposal lending when credit is easy and pull back faster in the crash.

This is the second time the central bank drops down the reserve ratio since last November but as far as I am concerned, cut interest rate or take fiscal stimulus will be more efficient, normally involving increased public spending and lower taxation which give a positive jolt to economic activity. The decline in the reserve ratio is unlikely to lead to lasting recovery unless accompanied by strong measures to further stabilize and strengthen the financial system, so a new downturn with a massive fiscal stimulus package should be taken. (E.g. China last adopted a big stimulus package during the Asian financial crisis, when it succeeded in holding annual GDP growth at almost 8 %.)

However, perhaps the debate of the fiscal policy has not come to an agreement and need more studies in Chinese government. In addition, yet the Chinese government transition is near, it looks like the government will still spill over a little bit on the economy and the most important thing at the moment is the realization of steady and smooth transition, nor the positive and aggressive measures.