Wen's economic assessment shown well wide of the mark
Back in March, Premier Wen Jiabao described the mainland's economic development as 'unstable, unbalanced, unco-ordinated and unsustainable'.
The list of problems he identified was long and daunting. It included overinvestment, reckless lending, excessive liquidity, unbalanced foreign trade, inequality between cities and the countryside, inefficient energy use, wasteful allocation of resources and environmental ruin. Solving these, he said, would be 'extremely hard'.
Listening to Mr Wen this week, you might be forgiven for thinking he had succeeded. Beijing's economic controls had been effective, he told reporters in Moscow, and the mainland economy was a 'bright spot' in a gloomy world.
Yet it is hard to see what has changed for the better since March. Economic growth has accelerated rather than slowed, hitting 11.5 per cent in the third quarter, up from 11.1 per cent in 2006. Investment growth has picked up. Loan growth has far exceeded government targets, rising 17.13 per cent year on year in September from 16.25 per cent back in March. Money supply growth is accelerating and inflation has spiked up to 6.2 per cent, more than twice the government's target.
Meanwhile the mainland's trade surplus has blown out as import growth has slowed. Stock prices have doubled, widening the wealth gap between urban rich and rural poor. Government fuel price ceilings have encouraged energy waste and pollution worsened. At some point this year the mainland is likely to have overtaken the United States as the world's largest producer of greenhouse gasses.
Clearly if the mainland's economic trajectory was unstable, unbalanced, unco-ordinated and unsustainable back in March, it can only be less stable, less balanced, less co-ordinated and less sustainable today, no matter what Mr Wen says.
Yet to many critics, internal and external, the solution to Mr Wen's problems is straightforward. They argue that all Beijing has to do is allow the yuan to strengthen at a faster rate and that will automatically rebalance mainland growth.
The idea is that if the yuan were to rise faster, the mainland's trade surplus would shrink from current levels of around US$25 billion a month and liquidity flows into the economy would abate.
That would take some of the pressure off the central bank which has tried to contain liquidity growth by raising the proportion of deposits banks are required to set aside as reserves and issuing debt to soak up the excess.
Both strategies are costly. Banks earn very low returns on the reserves they hold at the central bank, which weakens the entire banking system. At the same time, to keep its mopping up of operations affordable, the central bank maintains a cap on interest rates. But this prevents interest rate liberalisation and delays financial sector reform.
Meanwhile, the cap on interest rates artificially lowers the cost of capital, encouraging over-investment in capital-intensive, export-oriented, highly polluting industries. This worsens the trade imbalance, exacerbates inflows and perpetuates resource misallocation, adding to environmental degradation.
Allowing the yuan to rise more quickly, say the enthusiasts, would solve many of Mr Wen's economic problems at a stroke. It would reduce liquidity inflows, allow interest rate deregulation and make capital-intensive investment less attractive, reducing the environmental burden and rebalancing the economy away from exports towards domestic consumption.
It is a plan that appeals to some in the central bank who would be comfortable with an appreciation of up to 10 per cent a year.
Not everyone is convinced. The Commerce Ministry has long opposed any strengthening of the yuan greater than about 3 per cent a year on the grounds it would jeopardise jobs in low-margin, labour-intensive industries like textiles.
Meanwhile, rural officials are concerned that a substantial appreciation of the yuan would lower the local price of imported foods, pricing inefficient mainland farmers out of their own markets and causing untold hardship in the countryside.
And then there are other central bankers who argue that faster yuan strengthening would only raise expectations of future appreciation, encouraging more, not fewer, inflows.
Given the disparity of views, in all likelihood we will see the yuan appreciate against the US dollar at a rate somewhere in the middle of the 3 to 10 per cent a year range over the short to medium term. That would imply a rate of about 6.5 per cent a year which is exactly what we have been seeing for the past few months. But whether that will help Mr Wen create stable, balanced, co-ordinated and sustainable growth is highly doubtful.
Jake van der Kamp is on holiday