China's economy is still moving on under the pressure of inflation for the first quarter of the year represented by high-level money supply and rising consumer prices index. But it will cool down in the second half of this year when macro control policies adopted by the government is felt. There is enough reason to encourage confidence in a soft landing of China's economy.

Pressures of inflation

China's economy is still under the pressure of inflation. This is indicated by the high-level money supply and rising consumer prices index (CPI) for the first quarter.

A report on the implementation of monetary policy issued by People's Bank of China, the central bank on May 11 showed the money supply was still high with robust increase in newly added loans extended by financial institutions.

For the first three months ending at the end of March, balance for broad money, or M2, stood at 23.2 trillion yuan, 19.1 percent higher and 0.6 percentage points faster than the same period of last year. But compared with the end of last year, it was 0.5 percentage points slower.

The balance of narrow money, or M1, registered 8.6 trillion yuan. This climb of 20.1 percent over the same period of last year was similar to that in the same period of last year and 1.4 percentage faster than the end of last year.

The balance of cash in circulation posted 1.9 trillion yuan, 12.8 percent higher than that in the same period of last year. A total of 44.9 billion yuan was withdrawn for Q1, 27.7 billion yuan more than the same period of last year.

By the end of Q1, the balance of loans in terms of RMB and foreign currencies reached 17.9 trillion yuan This means financial institutions granted credit with an increase of 20.7 percent at a pace of 1.2 percentage faster compared with the same period of last year, but the speed was 0.7 percentage points lower than the end of last year.

Specifically, loans in RMB recorded a balance of 16.7 trillion yuan, representing a rise of 20.1 percent with a speed of 0.2 faster than the same period of last year but a slowdown of 1 percentage point compared with the end of last year. The balance of 140.2 billion in terms of foreign currencies embodied a growth of 29.9 percent which was 17.3 percentage points and 3.2 percentage points faster than the same period of last year and the end of last year respectively.

The report also spotted out the destination and sources of the loans. For RMB loans, newly added loans mostly went to agricultural sector for short-term loans and infrastructure projects for long-term loans. Reduction mainly took place in instrument discounts business.

Reduction of newly extended loans was mainly attributable to state-owned commercial banks while other financial institutions granted more loans aggressively.

The first quarter also saw another 1.23 trillion yuan deposits in terms of RMB and foreign currencies put into financial institutions, a rise of 108.7 billion yuan on the basis of the growth of the same period of last year.

The report also includes statistics of consumer prices index for the first quarter of this year. The figures indicated mounting inflationary pressure on China's economy.

The increase in prices of materials for agricultural production and farm produces was more remarkable than that of CPI. For enterprises, purchasing prices climbed faster than invoice prices. The same thing happened between production materials and consumption materials, with the rise of prices of the former overriding that of the latter. Prices of imports particularly experienced a much more amazing upward movement compared with CPI.

Good chances of soft landing

Although the report of PBOC predicted CPI to maintain high for the second quarter, it expected a decline for the second half of the year.

The central bank based its conclusion on the following two reasons. First, CPI will drop after a further climb from April. Second, it will be sometime before macro-control policies begin to work. The effect of such policies adopted since last year is believed to be felt in the second half of this year.

Paris based Organization of Economic Cooperation and Development (OECD) released its report on May 11 on the global economy. The report says although there are signs of overheating in China's economy, it can manage a soft landing later. The report thinks the global economy, boosted by US, China and Japan, is gathering more momentum while the euro areas is lagging behind.

The report saw problems in China's economy which is experiencing tight energy supply and over production capacity in many industrial sectors due to the bulging investment. But it believes a soft landing is most likely to take place as China has taken various measures including controlling credits to harness the economy. The report predicts a growth of 9 percent for China's economy in 2004 and a mild drop in 2005.

The report argues that from a longer term perspective, China's contribution to the world's economy depends on whether China can carry on its economic reform. OECD says China's economy has a potential of a growth between 7 to 8 percent and China has to sustain its development to keep this momentum. The report stresses the importance of reform on China's state-owned enterprises (SOE) and banking system. It also suggests China speed up and step up efforts on having a solid social security system to facilitate the reform on this system and stability of the society.

This report also declares that US, Japan, ROK, Australia, as well as some small economies with slower development paces have benefited a lot from the robust growth of China's economy.

By People's Daily Online