Comment: Monetary Policy Is Not Suitable For Further Tightening

In the period before the 17th CPC National Congress, China has been implementing a moderately tight monetary policy. After the 17th National Congress of the CPC, China's macroeconomic regulation and control was further strengthened, and the main keynote of monetary policy was intensified from "moderately tight" to "tight". According to the economic environment at that time, the "tight" basis is indeed there: including rapid economic development, high investment in fixed assets, obvious inflation, prominent asset bubbles, and excessive liquidity.

However, from the practical experience, the formulation of monetary policy should not be a simple reflection of the past and the economic situation at that time, but should be based on the prediction of the future economic trend; that is to say, scientific and effective monetary policy must be foresighted and forward-looking. In addition to foresight, the state should also take full account of the lagging effect of previous regulatory policies when formulating monetary policy.

In 2007, the state's regulatory measures were particularly intensive, and the lagging effect was fully reflected in the 2008, and the economic prospects at home and abroad, we need to further study and rethink whether we need to tighten monetary policy further.

　　貨幣政策已不宜進一步收緊

First of all, the possibility of stagflation exists in the US economy. The sub-prime debt crisis has not only caused huge losses to us financial institutions, but also brought about a series of problems, such as credit crunch, stock market collapse, consumer confidence drop and unemployment rate rising. Although the US economy still recorded a low growth rate of 0.9% in the first quarter and did not fall into recession immediately, but because the sub crisis is still spreading, American house prices will continue to fall and internal consumption will be sluggish. Therefore, the US economy will not recover soon after the end of next year, even if it does not fall into a traditional recession immediately. Under the influence of global inflation, the possibility of stagflation of the US economy in the next one to two years is increasing. Dragged down by the US, the net export of China will obviously weaken the pulling effect of GDP, and the global environment for economic development and financial stability will also be in a more serious situation. Under such circumstances, further tightening of monetary policy is obviously not appropriate.

Secondly, the situation of our neighboring countries has entered a turbulent period. Over the past year, the political situation in Thailand, Mongolia and Pakistan has been unstable. Philippines, India, Vietnam and other countries are suffering from high inflation and a sharp decline in the stock market. Vietnam is also a sign of financial crisis, including hot money escaping, current-account deficit increasing, the stock market losing 60% in the past six months, CPI as high as 25.2%, and the Vietnamese shield being forced to depreciate. China's monetary policy and macroeconomic regulation should not be further tightened under the tension of the surrounding situation. We should maintain the necessary flexibility to actively promote the steady development of the national economy, so as to stabilize the situation in Asia and prepare for the possible storm of economic crisis.

Third, a large number of enterprises are facing unprecedented pressure to survive. On the one hand, the sharp rise in the prices of energy raw materials, the increase in interest rates on loans, the reduction of export tax rebate rates, the tightening of processing trade policies, the increase in wages and factory rents, and the promulgation of the labor contract law have greatly increased production costs, coupled with the appreciation of the Renminbi (cumulative rise of 21%), which has led many enterprises to enter into a state of small profits or even losses. On the other hand, the deposit reserve ratio has been transferred to a high level (17.5%). The strict scale control of bank loans has caused many enterprises, especially the small and medium-sized enterprises, to have a tight chain or even break up the capital chain. The interest rate of private lending in Wenzhou and Taizhou in Zhejiang has risen to about 30%. The above two factors have pushed a large number of enterprises to the brink of death. According to statistics from the textile industry association, 1/5 of the 44200 textile mills are in a loss and 2/3 are in a state of no compensation. According to the statistics of Guangdong provincial government, there are only 1512 left shoe enterprises in the Pearl River Delta region in 1-2 this year, a sharp decrease of 1855 compared with the same period last year. Similarly, Zhejiang's Enterprises above Designated Size have lost 20% of their losses. Among them, lighters in Wenzhou have been reduced to more than 600 from a year ago. After a large number of bankruptcies and losses, the most influential workers are blue collar workers and the banking system.

The driving force of China's economic growth is obviously weakening. From the foreign trade situation, the cumulative trade surplus in 1-6 months has dropped by 11.8%, of which the drop in June is more than 20%. If we cut off the export high and low reported data caused by the appreciation of the renminbi, the net export of China will probably drop even further. On the surface, the growth rate of fixed assets investment in urban areas in the 1-5 months is still 26%, which is similar to that of the same period last year. But if inflation is taken into account, the effective increase in fixed asset investment has actually dropped by about 7 percentage points over the same period last year. From the perspective of internal consumption, as the stock market has dropped by 55% from the high level in October last year, the wealth of the vast majority of shareholders has shrunk, coupled with the decline in corporate prosperity and inflation. In the case of net exports, investment and consumption, the "three carriages" have already entered the downlink range. GDP growth has dropped to 10.4% in the first half of the year, and is likely to further slow down to less than 10% in the second half. If the survival pressure of enterprises can not be alleviated and the tight regulation policy is not fine-tuning, we are worried that the macro-economy may decline further in the next two years or even fall into a more difficult situation.

The cumulative decline of China's stock market in 8 months was up to 55%, close to the level of the outbreak of the crisis in Vietnam. The stock market plunge is mainly caused by market defects such as non reduction and insider trading, as well as last year's rising and declining business prosperity, but it also has a certain relationship with the continuous tightening of monetary policy, especially the backwards cumulative effect of relevant regulatory measures. From the source of stock market, non-financial enterprises account for about half of the market value of stocks, a large part of which may come from bank loans. If the stock market has been in a depressed state after the collapse, we expect that the non-performing loan ratio of banks will rise sharply later. For retail investors and fund companies, most of their funds come from ordinary people. The stock market first rose to 6124 points, with an average price earnings ratio of 69 times, and then plunged to 2600 points. Under such circumstances, if the central bank tightens monetary policy again, it may become the last straw.

Compared with the stock market, the real estate market has not seen a sharp decline. However, since mortgage interest rates have been relatively high and psychological expectations are reversing, the volume of second-hand housing has shrunk for the past six months, and the price increases in most large and medium-sized cities have begun to fall. Affected by the sharp slowdown in sales and the tightening of loans, the capital of real estate companies is also generally tight, and some have even broken the capital chain. From a good point of view, a modest drop in housing prices will help people live and work in peace and contentment, and reduce the operating costs of the industry and commerce; but on the bad side, if the average housing prices in large and medium-sized cities fall by more than 30%, then a large number of bad loans and negative equity families will be generated, which will seriously affect consumer confidence and economic development, and ultimately bring about systemic financial risks. In view of this, real estate regulation should aim at a soft landing or a moderate drop in housing prices, and try to avoid big ups and downs in housing prices. Matched with this, monetary policy should remain stable after continued tightening, and avoid excessive tightening to bring adverse consequences similar to that of the US sub prime crisis.