Curbing Inflation Tops China’s Priorities

Today, the Chinese Premier Wen Jiabao delivered the 2007 government report to the annual National Peoples' Congress session. The report unveiled the top concerns of the Chinese government and shed light on China’s economic outlook. Understanding the new policies and plans of the Chinese government would allow investors to timely adjust their investment strategies.

1. Strive to curb inflation and keep CPI below 4.8%

The consumer price index [CPI] in January 2008 reached an 11-year high at 7.1% on rising food and commodity prices, and rapidly growing economy. The Chinese government places soaring inflation as the top concern and aims to keep CPI below 4.8% for the full year of 2008. To curb inflation, the government will impose stricter control on food exports and place caps on price gains for energy and natural resources. As such, we doubt that government would further delay the liberalization of oil product prices and the execution of coal tariff-linked mechanism.

In addition, the government will take steps to boost food supply by encouraging farmers to engage in grain, edible oils and meat production. The government will offer more subsidies on grain production and farming machineries purchase to farmers in the coming years.

2. Promote economic adjustment and change the pattern of development

China’s economic growth in the past five years had been encouraging, with GDP growth at a CAGR of 10.6%. Growth was largely boosted by secondary industry development, including fixed-asset investment growth and heavy industrial development. To maintain moderate economic growth, the government is aiming to rely more on local tertiary industry (also known as service industry) as the major pillar for long-term economic development.

In 2007, per capita disposable income in urban and rural areas amounted to RMB 13,786 and RMB 4,140, up 17.2% and 15.4% y-y, respectively. Along with the growing disposable income, we expect China's citizens to likely spend more for better living. Industries like tourism, luxury goods, and financial services would likely benefit in the long run.

3. Shut down outmoded and inefficient factories in heavily polluting industries

Pollution is a growing concern in China. The government is promising to reduce emissions, conserve energy and shut down outmoded and inefficient factories in heavily polluting industries, including electricity, steel, cement, coal and paper manufacturers. By implementing a capital requirement limitation and various environmental protection measures, the entry barrier for the aforementioned industries has been lifted up. We expect the leading top-tier enterprises in these industries to likely benefit from accelerating industry consolidation and further gain market shares with the elimination of small and uncompetitive players.

4. Encourage large enterprises to go overseas

The government encourages local competitive enterprises including players in telecom and the financial services industries to go overseas to seek investment opportunities. Having been plagued by the US sub-prime crisis and turmoil in the global financial markets, many well-known and well-established international enterprises are trading at decently attractive valuations. The above factors pose good timing and opportunities for China enterprises to strategically strive for a sustainable long-term development by acquiring and merging with renowned international firms.

5. Support medium- to long-term science and technology development

The annual research and development expenditures increased substantially to RMB 366.4B in 2007 from RMB 128.8B in 2002, and accounted for 1.49% of China's GDP. Heading towards a long-term society development, the government has recently set for medium- to long-term planning in science and technology development. Projects that could merit government subsidy include big aero plane development, new generation nuclear power, and telecommunication development.

Comments

[User 142738]

Good luck with that, Wen. The only way I see inflation lowering is when the Communist Party does any or all of the following:

- Remove all subsidies on agricultural and industrial products (not likely; about 600,000,000 people could starve to death).
- Take the cap off of foreign exchange transactions (also not likely; the yuan printing machines would wear out in a matter of days).
- Let the yuan float (somewhat likely).