Published March 11, 2013
BEIJING – Intense lobbying by central government agencies and debt-laden local governments is keeping People's Bank of China hawks in check after inflation jumped to a 10-month high, forcing the central bank to keep its monetary policy setting in neutral.
Official data showed China's anemic pace of economic recovery from the slowest year of growth since 1999 may have paled early this year with a cooling in the domestic demand the new government has promised will lead the revival.
Beijing's concerns over growth are leaving the central bank with little choice but to toe the line and help to keep the expansion going, senior sources with knowledge of the situation said.
One area of government pushing hard for growth is the country's powerful planning agency, the National Development and Reform Commission (NDRC), said one source.
"The NDRC must make sure that the economic growth goal will be achieved," said the source, an NDRC researcher who is involved in drafting policy and who takes part in internal discussions of policies. "We cannot see any room for policy tightening right now."
Data at the weekend showed that industrial output rose 9.9 percent in January and February, less than expected. Retail sales rose 12.3 percent, the weakest pace for the combined months since 2004. The figures disappointed some who had hoped for a stronger pick up in a recovery that only started in the fourth quarter following seven straight quarters of a slowdown.
At the same time, consumer prices in February rose a stronger-than-expected 3.2 percent from a year earlier, a big jump from January's 2.0 percent pace and pressing towards the government limit for the year of 3.5 percent.
Liu Mingkang, a former PBOC deputy governor and a former bank regulator, said the PBOC's mandate is to deliver the overall economic objectives pursued by the State Council.
The key parameters were outlined by outgoing Premier Wen Jiabao at the opening of the National People's Congress, or China's annual parliament meeting that is underway in Beijing. Apart from the inflation limit, it includes reaching full-year GDP growth of 7.5 percent and a rise in money supply of 13 percent.
The dilemma for policymakers is that rising prices sap the spending power of the Chinese Beijing wants to drive economic growth. But taking measures to check inflation could snub out the nascent growth they are trying to nurture.
Zhu Baoliang, chief economist at the State Information Centre, a top government think-tank, is clear about what the PBOC can not do at this point.
"There is no need to use policy tools such as raising interest rates, or bank reserve ratios in the near term," he told Reuters.
That would seem to restrict the PBOC to trying to calm inflationary pressure with the liquidity management tools it has experimented with in China's fledgling money markets, as well as so-called "window guidance" to curb loans by the country's Big Four banks, which dominate credit creation and lend at Beijing's behest.
Window guidance to ward off inflation pressure was clearly in evidence in February lending activity, according to the weekend data, which showed new bank loans fell to 620 billion yuan from 1.07 trillion in January, sharply undershooting market expectations of 750 billion yuan.
Take January and February together though and new loans are being extended at a 10 trillion yuan rate for the year, well above the 8.5-9 trillion yuan that Wang Jun, senior economist at the well-connected China Centre for International Economic Exchanges (CCIEE), believes the PBOC is tasked with for 2013.
Proportionately, most lending happens in the first quarter as banks put loan quotas to work and slows towards the end of the year as they are used up.
"Controlling inflation will not be the top priority this year. Stabilizing growth is still be more important. The chances of obvious policy tightening are unlikely this year," Wang said.
The central bank has gained more clout under the governorship of Zhou Xiaochuan, who has pursued a program of market-based reforms. But its lack of policy independence means it needs cabinet approval to adjust benchmark interest rates or the value of the yuan.
Its reforms though have allowed it to keep a reasonably tight rein on liquidity in the financial system - and the availability of funds banks have to lend - despite calls from China's provinces for aggressive monetary easing to support growth.
While those supporting economic growth have the upper hand, the policy debate could turn, the sources said.
Approval was given for around $150 billion worth of infrastructure projects last year, which has served to ramp up property prices and fuel a fresh round of housing speculation.
Real estate speculation is a red flag to a government worried that the urban middle class is increasingly being priced out of the property market in cities across the country.
Higher prices are also a sure way to sap the spending power of China's emerging consumer class that Beijing wants to nurture and drive the economy in future.
"The central bank may tighten monetary policy if it sees further rises in inflation," said an influential Chinese economist, who sits on the PBOC's monetary policy committee and requested anonymity given the sensitivity of the topic.
Analysts reckon inflation would have to top 3.5 percent for the central bank to win backing to tighten policy by raising benchmark interest rates or bank reserve requirements.
Still, the member on the PBOC monetary policy committee doubts inflation will rise above that level in the near term.
With nearly 3,000 delegates from across China in Beijing now for the NPC, there is no chance Xi Jinping and Li Keqiang - set to be confirmed as president and premier by the meeting's March 17 close - can miss the message from the provincial governments.
Huang Daowei, vice head of the southern Chinese region of Guangxi, is very clear on what policy settings must be for him to achieve his goal of closing the gap with richer provinces and who, like other provincial Party officials, will see his promotion prospects soar if his targets are met.
"We aim to maintain 12 percent economic growth this year, following the average 12.9 percent growth in the past decade," he told Reuters on the NPC's sidelines. "We don't expect policy to be tightened."
(Editing by Nick Edwards and Neil Fullick)