By Han Baojiang (China Daily)
Updated: 2007-12-20 07:24

Top authorities attending the Central Economic Work Conference earlier this month set the themes for next year's macro control policies: using a prudent fiscal policy and tight monetary policy to prevent the country's rapid economic growth from overheating, and structural price rises from becoming entrenched inflation.

The shift from nearly a decade of "prudent" monetary policy to a "tight" one is in line with the changes in the economy this year.

And combining a prudent fiscal policy with a tight monetary policy is an inevitable choice for the country in 2008, when it will host two major events - a personnel change in government in the spring and then the Olympic Games in the summer.

Therefore, it is important to identify those parts of the economy that need fixing, while tailoring macro control policy tools to provide efficient solutions. In this process, the first step is to keep the economy's sound and fast growth from overheating, while also avoiding cooling it off too much.

For years, the country has been building economic prosperity with a high growth rate, driven by many internal elements. Urbanization, industrialization, globalization and the growth of the market economy have allowed China to enjoy comprehensive economic and social progress.

Now that the country's 1.3 billion people are enjoying higher incomes than ever before, China has a big enough market to generate further economic development.

Thanks to the prosperity in the last decade, the Chinese economy is in a position to maintain its own growth. The effort is supported, primarily, by abundant capital from the high deposit ratio, huge inflows of foreign investment and gigantic reserves of foreign currency.

Other pillars of this effort are the cheap and well-educated labor force, the dramatic improvements in productive efficiency and the competition and mutual promotion of sectors of different ownerships.

Considering all these positive factors, it should be impossible for Chinese economy to become sluggish. A double-digit growth rate should not automatically be regarded as a signal of economic overheating.

The economy will be safe and sound until growth triggers inflation. Until then, it is unnecessary to worry about measures to cool things off.

All countries and economies go through periods of high-speed development, during which they accumulate enough wealth for future expansion. In China's case, decision-makers must keep their cool when they come up with macro control policies. They should preserve the momentum of normal economic growth while cooling off those sectors or regions that are moving at too brisk a pace.

They should also tailor their cooling measures to the needs of each region, as different parts of the country have attained different levels of development.

The better-off regions are more likely to be concerned about whether their economies are balanced, while the less developed regions should be focusing on accelerating their industrialization. Urban areas need to become more innovative, while rural areas want more investment.

Hence, the overall tightening of monetary policy, especially the measures to check investment, should not be applied across all regions without considering the local conditions.

Investment and lending schemes tailored to less developed regions and rural areas should be encouraged. In some situations, the authorities should help create an attractive environment for investment.

The tightened economic policy should bring down the price of some commodities, or at least stop them from flying high. Yet, it is worth mentioning that even this kind of policy should be applied prudently so that it does not stop normal price fluctuations.

The decision-makers should analyze commodities and give tailored diagnoses for each one.

They should keep an eye on price changes for consumer goods linked to the national security and the daily life of the people, like refined oil products, electricity and transportation. If the costs of these goods rose too high it could spread to other parts of the economy, which could harm the country. So efforts to check the prices of these goods should be multi-pronged.

That said, the prices of agricultural products should be allowed to rise.

For a long time, agricultural goods have sold at unreasonably low prices. These prices do not reflect the true value of these goods, which has hampered the development of the agriculture industry and kept farmers' incomes low.

When prices are allowed to rise to their true value, farmers will see bigger profits, which will unleash the whole industry.

Recent price rises have been more of a structural phenomenon caused by the lopsided development of the agriculture and industry, of the suppliers of industrial raw materials and the processing industry, so the countermeasures should also be structural in nature instead of a sweeping.

The decision-makers should consider adjusting their industrial policies to balance out these structural problems.

Policy tools should target shared goals without contradicting each other. Efforts must be made to find proper alignments for seemingly contradictory goals, like streamlining industry and boosting employment, protecting the environment in less developed regions and promoting local economic growth.

Macro controls should also be embodied in economic policy, legal policy and administrative means. And rigid administrative restriction should be avoided.

The author is a professor of economics with the Party School of the Central Committee of the Communist Party of China

(China Daily 12/20/2007 page10)