Greenspan, IMF words differ on China, but fears match
By Lisa Twaronite, CBS.MarketWatch.com
TOKYO (CBS.MW) - When it comes to the success of China's steps to slow down
its booming economy, Federal Reserve Chairman Alan Greenspan and the
International Monetary Fund are reading from different pages.
But while the tone of their short-term assessment of China's policies to
date may differ, both certainly share the same fears about the long-term
outcome of those policies.
Growth in Asia has "braked sharply" in recent months, as Chinese government
officials take policy steps to "muffle the boom" in the economy, Greenspan
said in written answers Tuesday to questions submitted by Senate Banking
Chairman Richard Shelby, R.-Ala., in conjunction with Greenspan's report to
Congress on monetary policy July 20. See full story.
In contrast, Steven Dunaway, deputy director of the IMF's Asia and Pacific
Department, said Wednesday that the most recent Chinese data gives a "mixed
picture" on whether the economy is actually slowing down.
This makes the IMF "cautious about how much of a slowdown has occurred up to
now," Dunaway told a press conference to coincide with the release of the
fund's latest review on China's economy. See full story.
Do "muffled boom" and "mixed picture" describe the same country? Yes, say
economists - when that country is an emerging market trying to deflate a
credit-driven investment bubble without choking off growth.
"Different observers of an economy have a different slant on it, so I don't
think there's a great mystery there," said Paul Sheard, Lehman Brothers'
chief economist for Asia.
In terms of data and transparency, China lags behind much of the developed
world, which can make tracking its progress difficult, he said.
"We're talking about a transitional economy, one in which market forces are
working in a selective way, so nobody is quite sure exactly what's going in
China," he said. "So I think we'll cut the IMF and Fed some slack."
On one key point, both Greenspan's and the IMF's assessments were strikingly
similar.
Greenspan said there is still a risk of a hard landing in China, while the
IMF said a soft landing for the Chinese economy "is not yet assured."
Both Greenspan and the IMF recognize that China has been an engine of growth
for the global economy, and neither expects that engine to slow this year.
The IMF raised its forecast for China's real gross domestic product growth
to 9.0 percent in 2004 from the previous estimate of 8.5 percent.
Greenspan predicted that "continued strong export growth and recent signs of
an acceleration in consumer spending suggest that Chinese GDP growth will
rebound in the second half of the year."
Greenspan didn't offer China any monetary advice, but some IMF directors and
staff recommended a tightening.
So far, the Chinese government has mainly relied on administrative cooling
measures.
"We saw more of a pressing need for some additional monetary tightening to
take excess liquidity out of the banking system. We thought that sooner
would probably be better to ensure there is a nice slowdown in the economy,"
Dunaway said.
Some private economists disagree, and say that further tightening would lead
not to a "nice slowdown," but to a credit crunch that would strangle
investment and threaten growth.
The last word, of course, will come from Chinese officials themselves.
On Monday, central bank governor China's central bank governor Zhou
Xiaochuan issued his own "good news/bad news" assessment in a statement on
the bank's Web site. See full story.
"The economy is heading towards the direction set in our macro-economic
control campaign, but up to now, there is still no apparent easing in the
expansion of demand and inflationary pressure," Zhou said, according to AFX-Asia.
At the very least, most economists agree that Chinese officials might not
know where their economy is headed, but they understand where it's been and
what brought it there. They also grasp the gravity of the decisions that lie
ahead for them.
"Investment bubbles are notoriously difficult to get under control in the
best of times," said Lehman Brothers' Sheard. "The Chinese are, of course,
aware of that, as are the IMF and the Fed."
Source: CBS Market Watch
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