Over the past year Beijing has been caught between sticking to restrictive policies to achieve a ‘soft landing’ and switching gears to deal with the repercussions of the eurozone crisis. The cut in China’s bank reserve ratio by 50 basis points, which came as a surprise to some, signals that the risks of a major economic slowdown are now of greater concern than an overheated economy. Data showing that Chinese manufacturing activity contracted last month for the first time in almost three years only added to those fears.
China has been doing well in moderating inflation while moving to a more sustainable, but still robust growth rate. Inflation has fallen steadily to 5.5 per cent and should continue to slow. Growth has also slowed from 10.6 per cent in last year, to an estimated 9.3 per cent this year and eight to 8.5 per cent next year. But Beijing has been hesitant in moving to more accommodating policies for fear that the underlying forces that could lead to an overheated economy have not been fully addressed.
The leadership is particularly keen on reducing speculative activity in the property sector. Modest declines in house prices would be welcome, but a widespread collapse would foster serious problems. Recent statements that the property bubble and the debt servicing problems faced by local authorities still needed attention raised doubts that less restrictive policies were imminent.