Monetary policy change not seen in bureaucratic character
Is China going to end its lax monetary policy? That question has cost the Hang Seng Index more than 2,000 points in the last three weeks.
To answer it, I refer you to the newly established Energy Commission.
Weird? No. One has to understand the characteristics of the mainland bureaucracy in order to predict how it will respond to an economic problem. There can't be a more telling example than the events leading up to the formation of the new commission.
Wind the clock back to 2005, China has been experiencing continuous years of stellar growth but the energy shortage is putting a brake on the country's churning engines.
Calls for the establishment of a ministry of energy or some kind of co-ordinated effort to secure the country's power emerged which in the end led to the establishment of the National Energy Leading Group.
Like the newly formed Energy Commission, this small group was chaired by the premier and while that gave it seniority at a symbolic level, it also meant nothing concrete would be done.
In the next three years, geopolitical tensions rose, oil prices climbed to new heights, drivers queued for hours for petrol and mainland energy firms found growing political resistance to their acquisitions abroad.
A campaign for an energy ministry starts spreading from the private sector and think tanks to the government. By the spring of 2008, the ministry's establishment seemed imminent. Instead, a toothless National Energy Bureau was formed under the National Development and Reform Commission and the leading group was disbanded.
For many it was a surprising and disappointing move, but not for those in the corridors of power.
A new ministry means redistribution of power and therefore money. But the NDRC does not want to give up its control over energy prices. The State Asset Supervision and Administration Commission does not want to give up its control over the oil and power firms. Neither do the firms want to see a change in control and their profit-maximising efforts. The list can go on and on.
Understandably, many say no to the need for an energy ministry.
This would not matter to a strongman leadership, but with one that commands limited control and confidence, this hurdle is real.
The result was a department that had the mandate but not the power to make energy policy. It was not a ministerial entity. It had no say in energy prices. It had no control over any energy firms. It had no veto in any energy operation. To nobody's surprise, it has achieved little.
The status quo continued until last year when the financial crisis forced the country to review its economic, foreign affairs and energy policies, while the abnormally cold winter turned the problems of the internal energy system into daily headlines.
Nationwide shortages of coal, electricity and natural gas as well as blackouts and factory closures translate into mounting political pressure.
Finally, this week the Energy Commission was established. Headed by the premier, it includes the leaders of 18 ministries or departments in the hope that by making every key party a stakeholder instead of bringing in new players, the machine will get moving.
This is typical of the current rule-by-consensus government. No difficult decision will be made until there is a crisis.
This is not a government that will make any swift change to its monetary policy in the near term.
Yes, in the past few weeks you have seen an earlier-than-expected increase in the bank reserve ratio, a rise in the short-term bill rate, a tightening of credit for property investors, a special reserve ratio for banks with excessive lending and an order by the regulators for banks to make daily loan reports.
This is no more than a knee-jerk reaction to the eye-popping credit growth. While Beijing targets 7.5 trillion yuan (HK$8.54 trillion) of new loans for this year, the banks dished out 900 billion yuan in the first week of the year. By January 19, this figure had risen to 1.45 trillion yuan.
Those figures are alarming enough to grant the central bank and the bank regulator, which have the primary responsibility of keeping inflation down and bad debt low, strong support for an immediate yet controlled check or warning.
It is difficult for other departments, whose subordinates have been benefiting from a red hot economy, to argue against.
But a change in monetary policy is different. That requires a consensus of every party that the economy is overheating. It isn't easy.
The overheating camp can point to various warning signals. Investment, loan growth, corporate profits and government revenue all recorded strong growth with a rapid acceleration in the second half of last year. The fourth quarter gross domestic product growth rate was 10.7 per cent while consumer price inflation rose to nearly 2per cent last month after staying in the negative for the previous 13 months.
But its opponents also have plenty of evidence to argue against. Among them is the weak nominal growth rate of 6.8 per cent for the full year, the sharp slowdown of investment growth in the last quarter of last year, stagnant urban income growth and dropping non-car related retail sales growth.
This debate will take some time. Let's remember, in 2007 it took the government almost a year to agree that the economy was overheating, inflation was kicking in and for cooling to become the new tone.
The whole process will be further complicated by the fact that the leadership will be reshuffled in 2012 and the manoeuvring at various levels has already begun.
Some of you may question my doubts about Beijing's responsiveness to macroeconomic issues, pointing to the dramatic success in boosting the economy. Yes, but that's about doling out money and who would oppose that?
In the meantime, let's listen to what regional officials are saying in the continuing meetings of the Chinese People's Political Consultative Conference and National People's Congress.
According to various attendees, they are talking about 'facilitating' instead of 'regulating' the economy, 'supporting' rather than 'cooling' the property sector and 'continuing' as opposed to 'lowering' lending. Telling, don't you think?