The Central Economic Work Conference was held in Beijing on December 3-5, setting the tone for China's economic development in 2008.

Just say no: inflation and overheating

Senior economist Zhang Yongjun with State Information Center stated the primary tasks next year would be two "preventions": preventing the already fast economic growth from becoming overheated, and preventing the price increases from creating real inflation.

"This shows a new change in the development tasks," said Zhang.

Zhang said the Central Government has proposed to maintain a "prudent fiscal policy and tightened monetary policy, which are the biggest policy changes in a decade.

After the 1997 Asian financial crisis, China adopted "prudent monetary policy" to cope with the serious regional economic situation. From 1998 to 2002, in order to manage deflation, China chose to increase its money supply. Starting from 2003, the fast growth in domestic loans, investments and foreign reserves changed the Chinese economy significantly. Newly added loans in the first 10 months this year were 110 percent more than the total last year. Meanwhile, the broad money supply (M2) by the end of November grew 18.45 percent year on year, while the growth rate was 1.51 percent more than that of the same period last year.

Yet excessive liquidity still exists and consumer prices are still on the rise.

"The monetary policy has been changed from ‘prudent' to ‘tightened,' which sends out a strong signal to further tighten the money supply," said Zhang. "It is a correct decision made by the central government based on macroeconomic performance."

One week after the completion of Central Economic Work Conference, People's Bank of China, the central bank, announced that lenders must put another 1-percentage-point deposit with the central bank effective from December 25.

This reserve requirement ratio increase will absorb 400 billion yuan ($54.05 billion) and is the largest rise in two years. Previously, the ratio was raised 0.5 percentage points each time. In total, the central bank has raised the reserve requirement ratio 10 times this year.

Zhang predicts that the tightening effort will continue. In the future, the central bank will possibly combine market policy and administrative policy and come up with series of monetary controlling measures.

Ha Jiming, Chief Economist with China International Capital Corp., said that under the tightened control, foreign reserve growth next year will be slower than this year. Ha forecasts that the 2008 broad money supply (M2) growth will decrease to 16-16.5 percent from the estimated 17.6 percent of this year. Moreover, money available to buy stocks might also decrease next year.

Preventing investment from rebounding is also a key task. The Central Economic Work Conference said that in 2008, China will continue to control financial expenditures, strictly control newly added projects, and maintain the economic growth rate at a rational level.

According to the latest statistics from National Bureau of Statistics, the fixed asset investments are still running at a high speed. In October, urban fixed assets investments grew 30.7 percent year on year, up 13.9 percentage points over the same period last year. By the end of October, a total of 6.67 trillion yuan ($901.35 billion) was invested in newly started projects, rising 26.5 percent year on year, the highest growth since May 2006.

"The huge number of newly started projects indicates the investment next year will still keep a high growth rate," said Zhu Baoliang, an economist with the State Information Center. Zhu said this is a realistic task to prevent the economy from becoming overheated.

Will the tightened monetary policy seriously affect Chinese economic growth? Ha argues that the government won't sacrifice the economic growth rate to curb inflation.

Li Yongsen, an economic professor with Renmin University of China, said the tightened monetary policy does not mean the economy is going bad. The economy is still running at a stable level, Li said. The guidelines send out a signal that the Central Government intends to achieve stable, sustainable and healthy economic development.

Encouraging consumption

The economic work conference raised the issues of coordinating consumption, investment and export, expanding employment, rationally adjusting income distribution, raising income levels and improving the social security system.

Cao Jianhai, an industrial researcher with the Chinese Academy of Social Sciences (CASS), said the new guidelines will continue to expand domestic demand and improve consumption ability.

In the first three quarters of this year, consumption contributed 37 percent to the GDP growth, slightly higher than before. But the proportion of investment takes the largest share, contributing 41.6 percent.

Cao said that judging by the common rule of global economic development, consumption is the eventual momentum for economic growth, and should account for about 80 percent of that growth. Currently, the lack of consumption ability is a big problem in China.

Li Xiangyang, Vice Director of the Institute of World Economics and Politics of the CASS, said the investment proportion is nearly 20 percentage points higher than that of developed countries, but consumption is 20 percentage points lower.

"The reason is very complicated," said Li.

First, the lack of domestic consumption can be attributed to a shortage of disposable income. Second, the increasing government fiscal revenue was mostly put into administrative expenditures and production investments. Moreover, the insufficient social security system in terms of education, medical insurance and housing has raised forward consumption expenditures, which in turn suppressed consumers' ability to consume.

Li suggested that adopting a series of adjustment measures to handle the supply and demand imbalance would be of benefit. Irrational investment demand and export demand must be strictly constrained, Li said, adding that it is crucial to protect the consumption ability of those with low incomes under recent inflation pressures.

Focusing on weak links

When setting the tone for next year, the Chinese Government will pay more attention to weak links in social and economic development.

It was stated clearly at the economic work conference that in 2008 the government will invest more to improve the standard of living.

According to the conference, China will expand employment, establish a rural pension system, carry out medical insurance reform as well as launch free compulsory education in both rural and urban areas. It was also said at the conference that the government will speed up the construction of affordable housing.

Zhou Tianyong, Deputy Director of the Research Office at the Party School of the Central Committee of the CPC, pointed out three aspects concerning people's living. First, the government will take more measures to improve people's income. Second, the social security system will cover more citizens. A better pension and medical insurance system in urban and rural areas will be established to benefit weak groups. Third, the government will invest more in education.

"The conference shows the government will pay more attention to the disadvantaged group of society," said Zhou.