Home / World Business
Mon, Aug 23, 2004 - Page 12 News List

Official planners undermine Deng's vision

AFP , SHANGHAI

Guests check out a luxury car produced by Morgan Motor Co of Britain at an auto show in Shanghai, yesterday. When late Chinese leader Deng Xiao-ping declared that ``to get rich is glorious'' almost 20 years ago, he wed a then hard-line communist nation to free-market capitalism. Nevertheless, China's ruling communist party, for better or worse, remains a command economy planner.

PHOTO: AFP

When late Chinese leader Deng Xiao-ping declared that "to get rich is glorious" over two decades ago, he wed a then hard-line communist nation to a very unlikely bride -- free market capitalism.

Most would agree that the surprise union between the ideas of 18th century free marketeer Adam Smith and the father of communism Karl Marx has been an improbable success, bringing unprecedented economic prosperity to the world's most populous country.

But behind the veil of sparkling commercialism of cities such as Shanghai -- a paragon of the country's vowed loyalty to Smith's principles -- China's ruling communist party is at heart still a command economy planner.

Over the past year Beijing has implemented a set of centrally dictated policies aimed at slowing the globe's fastest growing economy by ordering bankers whom to lend to.

Economists and observers have in the meantime speculated on whether China's central bank, the People's Bank of China (PBoC), would raise interest rates for the first time since 1995 to slow an economy that grew at 9.7 percent in the first six months of the year.

Domestic and international economists believe there is little doubt that the central bank wants to raise benchmark rates now at 5.3 percent, but is being hindered by strong political opposition from varying party and ministerial factions.

While most economists would argue that a substantial increase in interest rates would be an efficient and effective means of cooling down overheated investment in China, Eddie Wong, ABN AMRO chief Asia strategist, said, "political resistance to this policy is still high."

Fudan University economist Hua Min added that "the central bank wants to raise interest rate because it wants to show the correctness of the policy," but it cannot do so now because there are some signs of economic slowing.

In the past 15 months China has gone through a range of administrative measures chosen to selectively choke off credit to sectors such as steel, cement and real estate, deemed to be on the verge of bursting the country's over-investment bubble.

"The move," said Wong "has effectively slowed part of the economy, but in a fairly messy way."

"Banks have tightened too much on working capital loans to SMEs [small and medium enterprises] and private companies, but are still too relaxed on granting fixed asset investment loans," Wong said.

"Although this is not what the PBoC wants the banks to do, it is rational from the banks standpoint, because large state companies are unlikely to be allowed to go bust, while SMEs and private companies are more dispensable when the economy slows," he added.

"Indiscriminate tightening on lending to SMEs and private companies and their continuing willingness to lend to large state companies has reduced the effectiveness of any government control on investment growth."

China's current round of credit tightening, analysts also argue, has done little to establish the market discipline that lumbering state domestic enterprises need most.

"Clearly, it has not changed the mentality of companies and local government officials," Wong said.

Li Ruoyu, an economist at government think-tank State Information Center, said that at issue for the bank is the legacy of central planning.

"Any change that will generally affect the economy cannot be decided by a certain single department," Li said.

This story has been viewed 3844 times.

Comments will be moderated. Keep comments relevant to the article. Remarks containing abusive and obscene language, personal attacks of any kind or promotion will be removed and the user banned. Final decision will be at the discretion of the Taipei Times.

TOP top