beyondbrics

As far as government statements go, Premier Wen Jiabao’s pledge to “preemptively fine-tune policy at a suitable time and by an appropriate degree” hardly seems one to get excited about.

But for investors and analysts who are masters of deciphering Beijing-speak, Wen’s words carried the promise of something that beleaguered markets have long been waiting for: an easing, albeit a moderate one, of China’s monetary straitjacket of the past year.

Lu Ting, an economist with Merrill Lynch-Bank of America, said the language suggested that the government was ready “to roll out more pro-growth measures”.

He added in a note: “Beijing’s flexibility is likely needed at the moment (we see some signs of over-tightening) and this flexibility supports our call for a soft-landing”.

Shen Jianguan with Mizuho Securities said: “In our view, this was not a casual remark. Instead, it is the government’s acknowledgment of a growing liquidity crunch in the economy, and marks the beginning of policy loosening in China.”

And the Shanghai Composite Index bucked the widespread risk-off turn in global markets to rise 0.8 percent on Wednesday, making for a total gain of 4.8 percent so far this week.

To be sure, Wen’s words are so malleable that they can be molded into virtually any meaning that people wish to ascribe to them. Fine-tuning policy at a suitable time by an appropriate degree is a good general description of the day-to-day work of all governments. What would truly be news-worthy is if the premier had vowed to radically overhaul policy at an unsuitable time and by an inappropriate degree. Alas, no such surprises.

So what makes Wen’s statement more notable is not his words themselves, but rather the broader context surrounding them.

The Chinese economy has so far held up remarkably well through the global turmoil but it is slowing and analysts expect the slowdown to intensify in coming quarters. The main reason is domestic policy, not the troubles abroad.

Determined to put a lid on inflation, Beijing has placed sharp restrictions on bank lending. It has hit its mark. The broad M2 measure of money supply – a key gauge of the liquidity environment in China – expanded by 13 per cent year-on-year in September. Though that might be an understatement because of difficulties in measuring off-balance-sheet activity, it is fair to conclude that M2 has fallen below the central bank’s target of a 16 per cent increase, the level deemed to be consistent with high economic growth and low inflation.

In other words, at current policy settings, the government is deliberately sacrificing some growth in the interest of calming price pressures. But the balance of that trade-off is changing.

After remaining stubbornly high for months, many economists expect that the consumer price index will markedly fall this month. At the same time, the Chinese government is paying more attention to the collateral victims of its tightening; for example, over the past two months, it has unveiled measures to provide additional credit support to small private enterprises, which have suffered more than most.

Any policy shift, though, is likely to be mild and gradual because the government knows it has yet to slay the inflation demons. On this point, Premier Wen was as clear as could be: “stabilising price levels is our most important task”.

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