& çâÌæÚUæð´ ·¤è ¥ôÚU Îð¹Ùæ ÁæÚUè ÚU¹ð´ ¥ÍæüÌ ¥ÂÙð ÜÿØ ÂÚU ŠØæÙ ÚU¹ð´Ð ãæÚU Ù ×æÙð´, €UØô´ç·¤ ·¤æ× ·¤ÚUÙð âð ¥æÂ·¤ô ©gðàØ ·¤è Âýæç# ãôÌè ãñ ¥õÚU ÁèßÙ ·¤æ ¹æÜèÂÙ ÎêÚU ãôÌæ ãñÐ ÖÜð ãè ÁèßÙ ×ð´ ç·¤ÌÙè Öè ·¤çÆÙæ§ü €UØô´ Ù ¥æ°, çÁ™ææâæ ¥õÚU ©ˆâæã ÕÙæ° ÚU¹ð´Ð ŠØæÙ ÚU¹ð´, ÜÿØ ã×ðàææ ¥æÂ·Ô¤ Âæâ ãôÌð ãñ´ çÁ‹ãð´ ÂæÙð ·Ô¤ çÜ° ÂýØæâ ¥æÂ ·¤Öè Öè àæéM¤ ·¤ÚU â·¤Ìð ãñ´Ð

CONNECTING THE DOTS

How is the Chinese economy doing?
CHINA'S economic prospects will be a key factor shaping how the global economy will fare in 2012. As China entered the year of the dragon in 2012, it
did so with an economy that is clearly losing steam. China posted an annual growth of 9.2% for 2011. However, the focus on the officially reported growth masks the true extent of the deceleration in the economy.
Growth in China has probably bottomed out for now and GDP is set to rise by around 8.5% this year. The authorities have made concerted efforts to loosen monetary policy over the past few months as inflation has slowed and property prices have fallen. This has led to lower market interest rates and faster credit growth. What's more, a further cut in required reserves by the Central Bank is likely to take place later in the year.
It is not hard to find evidence of economic weakness in China. Imports, retail spending, property sales and, of course, GDP growth all slowed. Some of the moderation in the economy reflects the prior tightening of monetary and fiscal policies aimed at controlling inflation and dampening a real estate boom. Although weaker com-imodity prices have lowered inflation as well, the restrictive policies seem to be paying dividends. Consumer inflation has eased in recent months. Real estate is still red hot, but is showing signs of cooling.
The good news is that domestic demand remains robust. Investment — by far the biggest catalyst to expansion in recent years — has been restrained by the tighter policies but retains considerable strength. And, the deceleration of inflation has helped to boost consumer spending.
The story on the international trade front is far less encouraging. Weaker export growth is weighing down the economy. The economic troubles in Europe took a major toll, with export growth to the European Union falling by more than 50%. The weaker export demand at a time of strong domestic
growth over the past couple of years has had a dramatic impact on China's trade surplus, which has dropped by about 50%. While at face value this is a positive outcome in the sense of unwinding one of the major global economic imbalances, it has not happened in the ideal way of rising Chinese consumption, but rather has reflected weakness abroad.
Going forward, China's economy will likely continue to slow over the next few quarters. A significant recession in Europe will weigh down China's export growth, and improved demand in the United States will not provide a full offset. China will be more reliant on domestic demand for growth in 2012 — something global leaders have been calling for a long time. A key financial question is whether China's leaders will allow the renminbi (RMB) to further appreciate in this environment.
On April 14, the Peoples Bank of China (PBoC) announced it would allow the renminbi to trade on a wider
the IMF-World Bank Spring meetings. The US Treasury has just postponed its semi-annual report on currency manipulators required by the US Congress, perhaps waiting for the upcoming round of Strategic and Economic Dialogue between China and the U.S. government.
Allowing the RMB to move more freely would not only defuse some of the external pressures from China's main trading partners, but also reduce some of the costs associated with foreign exchange intervention. Such actions by the PBoC generate inflationary pressures. As the central bank buys US dollars to keep the domestic exchange rate within its band, RMB liquidity is injected into the local economy and full sterilisation of those funds is not always achieved. Therefore, having a wider band might reduce the magnitude of these interventions, thus removing some of China's domestic inflationary pressures.
The expansion of the exchange rate band of the Chinese renminbi should be considered as one component within a broader strategy to increase the global reach of the RMB and to gradually relax the country's capital controls. This is a process that will require other significant structural adjust->ments in the Chinese economy, most notably to its banking system. Therefore, as with any structural shift, it will play out over a long period. Furthermore, it may also be part of ongoing efforts to change its growth model from one led by export/investments to one where aggregate consumption plays a more prominent role.
In the short term, however, a wider RMB trading band will most likely mean more volatility, but not necessarily more appreciation, of the RMB. There are a number of factors that have lessened the case for a strengthening of the RMB. China's trade surplus has been narrowing, economic activity has cooled, the inflation rate has dropped, and there have been modest capital outflows. All these elements offer a weaker case for RMB appreciation in the short term.
band around the central parity established daily. The band is being expanded from +/- 0.5% to +/-1%.
This initiative, which will bring more flexibility to the Chinese currency, should not be analysed in isolation, but as a component of a broader strategy to boost the role of the RMB as a global currency. It also reflects a further step towards liberalisation of China's capital account. Other recent measures along the same line included schemes that allow foreign investors to make RMB investments in China, launching of a regulated junk corporate bond market in the mainland, the creation in mid-2010 of a RMB-denominated corporate bond market in Hong Kong.
There is also a political dimension to this decision by the PBoC. As had been the case in the past — e.g., prior to the Toronto G-20 summit in June 2010 --Chinese authorities might have timed their announcement on the RMB to fend off poten->tial criticism from both advanced and developing economies at
The writer is a Professor and Chair, Department of Economics, Marquette University.
Email: abdur.chowdhury@marquette.edu