More discipline for growth

China: US and Chinese leaders seem to have opposite views on the global economy. Beijing thinks the recovery is still fragile, while the United States reckons it is faster than expected. Austerity in the euro zone is a concern. Yet China needs monetary discipline to combat domestic exuberance.

The euro zone sovereign debt crisis seems to have prompted Chinese leaders to have second thoughts about abandoning their economic rescue package. Though only about three per cent of exports go to Portugal, Ireland, Italy and Greece — the worst-affected countries — Europe as a whole is China’s largest trading partner. The concern is that a prolonged period of slow or negative growth in the euro zone would hit Chinese exporters hard.

Beijing is also worried that property market cooling measures may lead to an economic hard landing. The State Council on April 15 unexpectedly announced harsh steps targeting properties, including raising mortgage rates and down payment requirements. That caused a slowdown in the volume of housing transactions and spurred a selloff in property and bank shares, dragging the Shanghai stock market to a one-year low.

However, China cannot afford a policy reversal. The overheated property market could still damage the economy as policies take time to bite. House prices jumped a record 12.8 per cent in April from a year earlier, and would need to fall 30 per cent just to get back to early 2009 levels. The latest measures will reduce prices by at most 10 per cent this year, because leverage is still low and owners are under little pressure to sell.

The risk of overheating is evident in the figures. The OECD’s leading indicators for China point to about 10 per cent GDP growth in the second and third quarters. Consumer prices rose 2.8 percent in the year to April, topping forecasts, and increasing the likelihood that China will miss its target of three per cent inflation in 2010.

China’s monetary stance still looks highly expansionary. The bank lending target set at the start of the year implies a 19 per cent expansion of the banks’ loan books. This is hardly a hard landing. The US judgement of the status of the global economy looks sensible. What China needs now is not more stimulus, but measures promoting more balanced growth.