Monday, January 26, 2004
Tuesday, January 27, 2004
Central bank battles move against curbs on spending
Provincial governors want to see more lending and an eventual higher tax take
ANDREW K. COLLIER in Beijing
The nation's stop-and-go economic policies reflect a top-level conflict, with the People's Bank of China fighting a rearguard action to rein in rampant spending, analysts say.
The official 9.1 per cent estimate of last year's gross domestic product growth masks a divisive debate within the bureaucracy about the pace of economic growth and how it should be managed.
The People's Bank of China (PBOC), under Zhou Xiaochuan, has been a strong proponent of tighter fiscal policy, worried over a combination of inflation and potential damage from bad investments in areas such as property and heavy industry.
But the central bank appears to have lost the debate in favour of provincial governors eager for higher tax revenue and the State Council worried about a slowing economy that might encourage unrest among laid-off workers.
"There was a major debate over the summer on monetary policy, leading to the confusing signals," said Nicholas Lardy, of the Institute for International Economics.
Although Mr Lardy is waiting for more lending data before drawing final conclusions, "indicators suggest that the PBOC/China Banking Regulatory Commission was losing out to the pro-growth crowd led by provincial/local officials with much support from various elements at the centre".
Political scientist Victor Shih, of Northwestern University, said: "There is clearly a political force out there pushing for more lending."
The central bank's hardnosed stance was set early. Last June, it announced tighter lending guidelines on property projects. In July after the bank's biannual conference, Mr Zhou warned of "excessive growth" in money supply and called for better allocation of financial resources.
His call for greater control over the economy came as loans nearly doubled to 1.4 trillion yuan and investment in fixed assets - which could include ailing state factories - rose to a high of nearly 30 per cent of GDP.
However, Mr Zhou's strict control over the banks has slowly been whittled away.
Last summer, the State Council called the property sector a "pillar industry", which many interpreted as a signal that the central bank's policies did not enjoy unconditional support at the highest levels of government. In December, in an abrupt about-face, the bank relaxed loan rules for purchasing cars, despite some analysts' concerns that sales were out of control. At the same time, it announced a 2.7 per cent cut in interest rates paid on excess bank reserves.
Analysts said the loosening of reins over the government's fiscal purse reflects several political factors.
One is the rising power of provincial governments, especially compared with the centralised regime of former premier Zhu Rongji.
The 16th Party Congress saw the number of provincial members of the Politburo outside the Standing Committee increased from five to seven. They are expected to seek a greater share of central tax revenue.
A policy to "build a prosperous society" was also announced at the party congress, widely interpreted as opening the fiscal floodgates to ease the burdens of economic change on displaced workers.
Another key issue is the role of Premier Wen Jiabao, the bureaucracy's potential strongman, but whose power is unclear in light of the continuing presence of former president Jiang Zemin.
Mr Shih said: "Mr Wen is waiting to see whether he is required to take a tougher stance on monetary policy. He would prefer not to, since raising interest rates would generate a lot of political opposition."