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Special> NPC & CPPCC Sessions 2013> Exclusive
UPDATED: March 18, 2013 NO. 12 MARCH 21, 2013
Macroeconomy Under Microscope

Outbound Investment

When assessing investment by Chinese companies, a small group of lawmakers in some developed countries still have a Cold War mentality.

For every $3 planned for investment in the United States, only $1 is approved by the U.S. authorities. But this is not the mainstream. Chinese investment is increasingly welcomed around the world.

The Chinese Government requires businesses investing overseas to abide by local laws, respect local cultures and traditions, and shoulder social responsibility.

The Chinese Government also supports Chinese enterprises to safeguard their legal rights in overseas markets, and would push host countries to create a more transparent and just environment to boost the confidence of foreign investors.

U.S. scrutiny over China's investment is understandable, and China is establishing its own system to examine foreign investment at home and hopes to learn from experiences in the United States.

Meanwhile, such examinations should be open and transparent in a way that can make overseas investment more predictable. For example, a foreign company may be asked by U.S. authorities to suspend or terminate its business three years after the start of operations, which can result in heavy losses.

Money Supply and Inflation

The People's Bank of China has stressed a need to control consumer prices. The broadest measure of money supply, M2, is closely linked to nominal GDP growth. When there is an oversupply of money, inflation may rise; when money supply is insufficient, economic growth will be frustrated.

We have done a good job on this front during the SARS epidemic period in 2003 and the global financial crisis in 2008. Some people tend to fix M2 according to GDP. However, in terms of the M2 to GDP ratio, Japan has higher ratio than China, but it suffers from deflation rather than inflation.

China has a higher savings rate than most countries. According to past experience, countries with high savings rate and hefty indirect financing activities usually have high M2 growth. Nevertheless, as long as we keep M2 growth at a proper level, drastic consumer price hikes will not happen.

Risks of Local Gov't Debt

We should not underestimate risks in local government financing vehicles, nor should we overestimate them. According to the categorization of local government financing vehicles by the China Banking Regulatory Commission, a large number of local government financing vehicles are funding projects including urban infrastructure and public services, and these projects are largely safe from insolvency if banks deal with them properly.

Another category of lending is based on mortgages, and the risks are controllable as long as mortgaged goods do not change remarkably.

But about 20 percent of local government financing vehicles are funding projects which are largely non-profitable and thus the debts have to be paid with other income.

More attention should be paid to the risks. Further reforms are needed to introduce new financing tools so as to ensure financial support for the country's urbanization.

At the same time, some local governments lacked proper financing channels when they launched projects amid urbanization. We should carry out more reforms, introduce more financial tools and make some adjustments to support the financing of projects which are likely to bring social benefits.

Email us at: yushujun@bjreview.com

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