Moderately Tight Economic Policies

China's two most powerful organizations, the National People's
Congress and the National Committee of the Chinese People's
Political Consultative Conference, just closed their annual
conferences in Beijing on March 16th, and then the governmental
financial administration, the People's Bank of China (PBC)
announced an increase in the interest rates of loans and savings
deposits of 0.27 percentage point respectively, effective March
19, which seems a decision by the two highest conferences. The
central government shall speed the reduction of credit in order
to control excessive investment, stop soaring housing prices,
and avoid further bubbles in the stock market. This is the third
action by PBC to tighten monetary policies this year. PBC raised
the deposit-reserve requirement rate by half a percentage point
on February 25th, and issued RMB120 billion of bills on March
8th to recover cash reserves from commercial banks, trying to
decrease the money supply. Some experts think those measures are
moderate and predict more severe measures to follow this year.
    Ma Kai, Director of the National Development and Reform
Commission (NDRC), reported to the recently closed highest
conferences that the 10.7% growth rate of China's GDP for the
year 2006 is in the normal range, regardless of some bad results,
such as pollutions, energy deficit. So the government hopes the
growth rate of economy should be moderate this year. He
emphasized that if energy and basic mineral resources are
consumed rapidly, China's economy cannot remain bullish for a
long time. The actions of PBC are intended to bring about a gentle
overall slowing.
    Energy saving and reduction of pollution were the major
topics of the highest conference. China's current role as 'The
World Factory' is not a desirable role for the long haul, some
senior statesmen think. Judging from industry trends, more and
more products that consume energy and mineral resources heavily
are being made in China and then are exported abroad, in other
words, China is increasingly exporting its energy and mineral
resources.
    Despite the tightened financial polices, heavy investment
continues. According to the policies of NDRC, the use of land
and money will be managed strictly in accordance with the
nation's concern for safety, environmental protection,
technical standards and energy consumption standards.
    Due to a long holiday (February 17-25), trading of
petrochemicals in the domestic market remained quiet with a
slight price drop while the prices of petroleum and
petrochemicals climbed in February. The price of polyethylene
averaged RMB12 894 per ton in February, increasing 12.92% over
a year earlier, but dropping 1.95% compared with January.
Similar price shifts were recorded for polyvinyl chloride, PET
chips and polybutadiene rubber. Some factors, such as low
inventory, production startup after the holiday and increased
petroleum prices, will push the prices up, while the tighten
policies and expanded production capacity will negatively
impact prices of petrochemicals.
    There is a rumor that the government will further decrease
or eliminate export restrictions for some products in order to
cut down the high favorable balance in foreign trade. Fuels,
cement, coals, minerals, steel, chemical fertilizers and
ceramics will be included.
    On March 20th, China's stock index hit a new historical high
after the woes on February 27th, seemingly unaffected by any new
financial policies. Today, nearly all stocks of chemical
companies have increased by around 50% since January 4th, 2007.


Zhong Weike
March 22nd, 2007