Sunday, November 2, 2008

China's economy sound, but challenges loom

China must prepare for the challenges sure to be brought about by the global financial crisis, though the economy is generally in good shape, central bank governor Zhou Xiaochuan said on Sunday.

Reporting to the Standing Committee of the National People's Congress, or parliament, on China's prospects in the face of the worst financial crisis in 80 years, Zhou struck a balance between confidence and caution.

"We must not underestimate the impact on our economy," he said on state television.

"The economy's basic momentum has not changed. But in order to confront the many destabilising and uncertain factors that exist, it is necessary to strengthen our awareness of the dangers, proactively cope with the challenges, and do a solid job of preparing to face potential difficulties."

China's capital controls and the relative conservatism of its banks have limited its direct exposure to the financial crisis sparked off by widespread defaults of US subprime mortgages.

Zhou noted that the country's financial institutions had grown stronger and more sound and that there was still ample cash available, boding well for the stability of the financial system even in the face of external risks.

Further, the great need for investment in infrastructure and the potential for expanding consumer demand could help cushion the impact of weakening exports, he said, according to a transcript of his remarks published by the China News Service.

Annual gross domestic product growth slowed to 9 percent in the third quarter from 10,1 percent in the second, and the government has come out with a raft of monetary and fiscal measures in the past weeks to stimulate growth, including two cuts in interest rates and banks' required reserves.

BETTER COMMUNICATION

Looking ahead, Zhou said that the central bank would work out an advance plan for how it could provide emergency help to banks should it need to do so, and would use normal monetary policy tools to ensure there was ample liquidity in the system.

The People's Bank of China (PBOC) would step up communication with other key central banks and improve its own supervision and management over speculative capital flows to ensure that no potentially damaging outflows would occur.

Zhou also said the PBOC would continue to reform interest rates to make them more market-orientated, and reiterated a long-standing pledge to improve exchange rate flexibility while keeping the yuan basically stable.

Premier Wen Jiabao said on Saturday that, while weakening external demand was hurting the economy, his government was confident it could keep growth steady through appropriate policies such as developing the countryside.

In the latest sign of weakening demand for Chinese products overseas, export deals struck at a recent trade fair in the market hub of Yiwu, Zhejiang province, fell over 3 percent from a year earlier, the official Xinhua news agency said.

But the government has been quick to roll out measures to keep the economy humming.

In addition to increasing export tax rebates for many products and making it easier for people to get mortgages, the government has announced that it will spend 2-trillion yuan on expanding its railways, greater than what it had previously committed.

Zhou added that the central bank would keep a close eye on consumer prices, even though inflation has eased in the past several months, slowing to an annual 4,6 percent in September from a peak of 8,7 percent in February.

He cautioned that inflation may rebound, but did not specify how that would affect monetary policy, which has recently shifted focus to supporting growth.