Tuesday, January 29, 2008

Ah, Premier Wen finally acknowledges the rock and the hard place that the Chinese economy is trapped in. Granted, it will still grow at at least 8% this year, but asset prices may suffer tremendously. When the market tanks in the US, Bernanke can decrease Fed Funds rates since inflation is relatively low. With a building monetary over-hang from the past few years, inflation is high in China, so even if Premier Wen ever changes his mind about wanting to depress housing and stock prices, OOPS, he can't do it because of inflation! With inflation, he would also have to control prices, which creates shortage and black-outs, thus further harming the export economy.

Wen warns of toughest year for economy

SCMP, Denise Tsang , Jan 29, 2008

Premier Wen Jiabao has warned for the first time that this will be a "most difficult year" for the mainland economy, which is caught between global economic uncertainties and crises at home.

In an unusually direct warning, Mr Wen told a State Council meeting that the rapidly growing nation faced strong headwinds that warranted "scientific democratic policies".

His comments were made last Thursday but released yesterday on the central government's website.

Although Mr Wen did not elaborate, some economists attributed his warning to a looming recession in the United States , the biggest consumer of Chinese exports; a 4.8 per cent jump in the mainland's inflation last year, the sharpest rise in 11 years; and the growing strength of the yuan against the US dollar.

Even natural disasters are plaguing the country at an inauspicious time. Severe snowstorms are sweeping across central and southern China , wreaking havoc on electrical supplies, coal and food, and leaving hundreds of thousands of workers stranded at train stations as they try to make their way home for the Lunar New Year.

"As we [State Council leaders] often discuss, we fear that 2008 will be the most difficult year for the economy," Mr Wen said in a tone that reflected deep concern.

"There are uncertainties in international circumstances and the economic environment, and there are new difficulties and contradictions in the domestic economy."

JP Morgan chief China economist Frank Gong said Mr Wen's comments signalled a change in policy in which the government was expected to spur domestic demand instead of curbing growth.

"They (state leaders) realise they have underestimated the impact of the external slowdown," Mr Gong said.

"This probably will lead to a change of policy from tightening to stimulating the economy."

He expected that Beijing would introduce measures to stimulate consumer spending.

"It was a mistake to say at the end of last year that the [2008] tightening had to be biased towards monetary tightening because the external market deteriorated quickly, obviously much faster than they had thought," he said. "The central government should have given themselves more policy flexibility."

Hong Kong exporters owning factories in Guangdong province have felt the pain of weak US consumer confidence, a stronger yuan, rising production costs and the havoc caused by the snowstorm.

Simon Shi Kai-biu, who runs motor-system manufacturer Sun Motor International in Shenzhen , said there were now three days of blackouts a week in Dongguan, up from two.

This has forced the company into a costly and polluting alternative - diesel-fuelled power generation - to avoid disrupting production.

"Generating our own electricity adds an extra 5 per cent to costs," Mr Shi said. "This is on top of extra costs for providing meals for workers who are not able to get home for the Lunar New Year."

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