How fast will China’s economy slow? And will China also slow the pace of RMB appreciation?

July 29, 2008

Chinese policy makers are concerned that China’s economy is slowing.

The stock market is obviously well off its highs, taming some animal spirits.

Housing prices in Shengzen are no longer rising.

Complaints from the export sector are growing – even though China’s exports are still up substantially relative to last year. Some forward looking indicators suggest that the global slowdown is catching up to China’s export sector – and a slowdown in exports could spillover into a slowdown in investment.

At the same time, China is worried about ongoing hot money inflows, and the ongoing difficulty sterilizing extraordinary fast reserve growth. A host of controls have been tightened. Controls on exporters. And now controls of FDI inflows. Yu Yongding of the Chinese Academic of Social Sciences characterizes China’s new capital account policy as “easy out, difficult in”. He is right. Note as well Dr. Yu’s comments on the “unattractiveness” of QDII)

And to make matters worse, there are fears that the recent rise in inflation has changed domestic expectations about future inflation. Dr. Yu writes that “inflation expectations have been firmly established among the public.”

Key members of the state council recently went south to hear the complaints of exporters first-hand. And Chinese policy makers are now meeting, reportedly to set the course of China’s economy policy over the course of the remainder of the year. Michael Pettis relays a report in the South China Morning Post:

The nation’s [China’s] top decision-making body, the Politburo, will meet this week to consider major economic policy for the mainland for the rest of the year amid growing concerns over slowing growth, rising inflation and, in particular, a dramatic decline in exports as the global economy slows. All the most senior leaders completed fact-finding missions to economic strongholds and key export bases early this week, according to reliable sources.

The policy choice is fairly binary: Should policy be directed at controlling inflation, or supporting growth?

(more…)

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