Innovative City (2004 Shanghai Economic Development Blue Book)

Author: Yin Jizuo, Editor-in-Chief
Publisher:
Publishing Date: 2004-01-01
Features: The overheating in these industries stems from systemic issues. Since local governments hold significant power over investment and financing, and officials' pursuit of performance can lead to repeated construction and investment mania when the economy booms. Some officials, driven by the desire for performance and profit incentives, inevitably engage in blind investment. Currently, many regions are launching entire vehicle factories and steel plants because of the high profitability of the automotive and steel industries. However, this high profitability does not stem from the competitiveness of manufacturers but rather from a very low profit starting point, protected high pricing, and preferential tax policies. The rapid rise in housing prices is largely due to local protectionism and pressure from vested interests, as local officials are reluctant to curb the excessive surge in prices. Weakening, reducing, or even abolishing the investment power of government officials is key to resolving the current localized overheating. Therefore, to address this localized overheating, a systemic issue, comprehensive measures must be taken to manage it, combining both administrative measures and market-based approaches; both macroeconomic control measures and industry-specific measures. At the same time, since economic overheating is localized rather than overall, we believe it is not advisable to adopt too many general governance measures (whether market-based, administrative, or planned).
Second, should monetary policy be tightened? We believe monetary policy can be moderately tightened but should not implement a contractionary monetary policy. As analyzed in the previous section, some overheating phenomena emerged in the economy in 2003, including a significant increase in credit from financial institutions, investment growth in some industries nearing 100%, and sustained rises in real estate prices. In this context, the People's Bank of China (PBOC) implemented a series of policies, such as the "Notice on Strengthening the Management of Real Estate Credit Business" and raising the reserve requirement ratio by one percentage point. Monetary policy became highly active but also drew widespread discussion. Some scholars even proposed that the greatest risk for next year is the risk of contractionary monetary policy. We believe that since the current overheating is localized, macroeconomic measures should be used sparingly. These measures not only affect the overheating industries but also harm currently underperforming industries, exacerbating their difficulties. Moreover, it is highly likely that the impact on overheating industries will be smaller than the impact on non-overheating industries. Macro measures will also directly affect China's most pressing issue—employment. Therefore, we recommend implementing targeted measures for these overheating industries. The PBOC's recent increase in the reserve requirement ratio was reasonable, as commercial banks already hold excess reserves with the central bank, so this adjustment has a limited impact on the economy. However, we suggest using fewer macro measures in the context of localized overheating. We predict that China will neither need to nor be likely to implement contractionary monetary policy next year but will continue to pursue a stable monetary policy (essentially a relatively loose monetary policy).
Third, should the RMB be revalued? Recently, pressure to revalue the RMB has intensified, with the United States, Japan, and the European Union all expressing demands for RMB appreciation. International