Where is China's Economic Policy Headed Next?

As someone who watches the Chinese market closely given its impact on the global procurement and supply chain stage, I often find it useful to step back from a sourcing and operational angle and look at the bigger economic picture (and the big red strings being pulled behind the scenes). A fairly recent Reuter's article is worth a look if you're curious about what could be next for Chinese macroeconomic policy. What's the bottom line? It appears that not rocking the red boat is in order, as "China's top leadership has ruled out big policy changes in the coming months, pledging to stick with its long-standing 'proactive' fiscal stance and a 'moderately loose' monetary setting." But how does this translate from a mid- to longer-term perspective?

The Reuters analysis suggests that the People's Bank of China, their equivalent of the Federal Reserve bank, will focus on maintaining liquidity in the market to "ensure banks have money to lend" to support both public and private (if you can call it that) sector investment and growth. Among other activities, we might continue to see new government stimulus support -- which would most likely disproportionately benefit Chinese industry, in our cursory view -- include "swifter approval of infrastructure schemes" including a new $100 billion investment "to speed the development of western China" as well as a government plan that "may ramp up construction of affordable homes for the country's 15 million low-income urban households and migrant workers pouring into cities."

To support both public and private sector lending and maintain as tight a grip as possible on the overall situation, the article suggests that we won't see an increase in benchmark interest rates (which are historically low, at 5.31%, by our analysis). Moreover -- and more relevant for the Spend Matters audience -- it is unlikely that we'll see a "swift rise in the yuan" as "economists polled by Reuters a month ago said they expected the currency to climb just 2.4 percent against the dollar by year's end. So in other words, look for China's economic policy to continue to do what it does best: to play to China's own interests at the expense of others, even if it means a continuation of playing by its own rules set and continuing to artificially keep the RMB low (which reduces the prospects of rising US imports into China as long as the dollar remains stronger than it should in relation to the RMB).

Jason Busch

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