Thursday, April 29, 2004

China Pulls Reins On Its Economy

China Pulls Reins On Its Economy
By James Cox

{Related story} China's Wen Tough On Economy
"If we change the system rashly, it will certainly bring unpredictable problems to the domestic economy, and at the same time could affect the financial stability of the region and even the world," the Chinese premier said.
{Related story} Who Pays For Big Bank's Risks
{Related story} I also highly advise reading Andy Xie's very important article: "Today's Inflation May Cause Tomorrow's Deflation"

China acted to brake its speeding economy Wednesday, while the Bush administration rejected calls to penalize Beijing for abusing workers' rights or pressure it to loosen currency controls that hurt U.S. manufacturers. (Related story: China economy zooms ahead, but growth might be too fast)

Chinese regulators issued new land-use guidelines to rein in booming industrial growth, the latest in a series of measures to cool an overheating economy. Earlier this week, Beijing:

• Raised reserve requirements for banks — for the third time in seven months — to slow lending.

• Capped the percentage of debt companies can use to fund cement, steel, aluminum and real estate projects.

• Signaled tighter credit policies are coming. Several Chinese commercial banks confirmed they have halted new loans in anticipation of rewritten rules.

Chinese leaders are concerned the country could face a banking collapse, surging unemployment and falling prices if the economy zooms ahead unchecked.

In an interview Wednesday with Reuters, Chinese Premier Wen Jiabao vowed "very forceful measures" to bring the economy under control. Chinese officials say their 2004 growth target is between 7% and 8%, a slowdown from the 9.7% annual rate China posted in the first quarter.

In Washington, Bush administration officials rejected an AFL-CIO request to investigate labor rights abuses in China. They also said they would use diplomacy rather than penalties to persuade China to loosen its currency peg.

U.S. Trade Representative Robert Zoellick said the administration has "serious concerns" about working conditions in China and the value of the Chinese yuan.

Manufacturers say Chinese goods are artificially cheap compared with rival U.S. products because Beijing ties the yuan to the dollar at a rate of 8.2 to 1. The U.S. ran a $124 billion trade deficit with China last year, the largest with any country.

Zoellick says the administration favors "leveraged engagement" to get Beijing to improve pay and rights for workers and adopt a more flexible currency policy. High-level talks with Beijing are getting results, including a ramped-up campaign to stamp out Chinese piracy of software and movies, he says.

The AFL-CIO, manufacturing groups and others calling for more pressure on China would push the U.S. toward "economic isolationism," Zoellick says.

Sen. John Kerry, D-Mass., President Bush's likely rival in November, accused the administration of refusing to "make any serious effort to use the legitimate rules that govern trade to level the playing field and prevent our businesses and workers from being taken to the cleaners."

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