Economy

China faces most complicated year

(Xinhua)
Updated: 2010-03-14 15:49

BEIJING - Chinese Premier Wen Jiabao said on Sunday that China is facing the "most complicated" economic conditions this year, and it will be "very cautious and flexible" in choosing the timing of the stimulus exist to shore up the hard-won recovery.

Since the world economy still faces the risk of "double dip", China has to strike a balance between maintaining economic growth, adjusting economic development model and managing inflation expectations, Wen told reporters after the conclusion of the annual parliamentary session.

As China has come under huge pressure for strengthening its currency, or yuan, Wen said China opposed to "fingerpointing" of its currency policy, and pledged to keep the yuan stable at an appropriate and balanced level.

'Double Dip' Risk

The complications facing the Chinese economy come from the tricky relations between its domestic economic targets and uncertainties in the global recovery, Wen said.

"Challenges and problems in the world economy have not been fully addressed, as major economies are plagued by high unemployment and debt crisis, which poses risk of a 'double dip'," Wen said.

As the world's major economies still kept in the mires of recession, China staged a speedy recovery with a 8.7-percent economic growth last year, on the back of a 4-trillion yuan stimulus package and 9.6 trillion yuan of bank loans.

However, the runaway monetary expansion adds concerns of asset bubbles, posing a dilemma for the government to keep a smart intensity of the stimulus to contain potential inflation without derailing economic expansion.

"We must be very cautious and flexible on decision of stimulus exist in order to shore up the hard-earned economic recovery," Wen said.

He restated to maintain the continuity and stability of macro economic policy, or the implementation of the proactive fiscal policy and moderately loose monetary policy.

The government will make more efforts to keep its policies flexible while keeping close watch on domestic and international economic changes, he said.

Consumer price growth quickened to 2.7 percent in February, the highest in 16 months, and also neared the 3 percent full year target set by the government.

The government should properly handle the relations between maintaining economic growth, adjusting economic development model and managing inflation expectation this year, which the premier described as "a tough job".

Wen said agriculture is the life-line of the national economy, and it plays a decisive role in ensuring economic growth and managing inflation expectations.

Although China quickly emerged from the global recession on stimulus, chronical problems such as over-dependence on public investments and exports still existed.

Wen said a lot of Chinese enterprises have not witnessed improvement in performance, and rely on stimulus to keep them afloat.

Priority must be given to economic restructuring and transformation in development pattern to solve China's economic imbalances, incoherence and unsustainability exposed in the crisis, he added.

Unchanged Stance on Stable Yuan

Since China leapfrogged Germany to become the world's largest exporter, the country is facing increasing criticism for devaluating the yuan to earn artificial price advantages.

"I don't think the yuan exchange rate is undervalued," Wen told reporters.

In July 2005, China abandoned a decade-old peg to the US dollar and allowed its currency to appreciate by 2.1 percent. Since then, the yuan has strengthened further, rising 21 percent against the US dollar.

Despite pressures for appreciation, China has kept the yuan exchange rate basically stable, which the premier said has helped facilitate the recovery of the global economy from the worst financial crisis in decades.

Wen rejected these pressures, saying "We oppose accusations and even forceful measures that press for yuan appreciation, which will not help the reform."

The premier reiterated China will further improve the yuan exchange rate formation mechanism and keep the yuan exchange rate basically stable at a reasonable and balanced level.

"Some countries' moves to shore up exports are understandable. But what I can not understand is they devaluate their own currencies while on the contrary pushing for the appreciation of others' currencies. I think it is protectionism," he said.

Wen said China will launch new measures to increase imports for balanced international payment and promote free trade, although protectionism worsens as the global financial crisis deepens.

In 2009, China's exports fell 16 percent from a year earlier while imports dropped only 11 percent, leading to a decline of 102 billion US dollars in trade surplus.

With China trying to shift to a more home-demand driven growth, consumption, replacing exports, is contributing more to drive the economy.

Of the 8.7-percent economic growth recorded last year, consumption contributed 4.6 percentage points, investment accounted for 8 percentage points while exports subtracted 3.9 percentage points.

China has become an important export market not only for its neighboring countries, including the Republic of Korea and Japan, but also the European Union and the United States, Wen said.

'Still Worrried' about Dollar Assets

At the conference, Wen explicitly stated that he is "still worried" about China's US dollar assets, the same remark that he had made last year on the same occasion.

"The instability of the US dollar is a great concern for China's foreign assets," he said, urging the US government to take actions to assure foreign investors of its treasury bonds

China remains the largest creditor of the United States by holding 894.8 billion USdollars in the US treasury bonds at the end of last year, according to the US Treasury Department.

Wen reiterated that China needs to guarantee the "safety, liquidity and good value" of its foreign exchange reserves and diversify the investment of the reserves.

"Safety is China's top concern for the country's foreign reserve investment," Wen said, noting that China cannot afford any mistake in the management of the country's financial assets.

Wen expressed hopes that the United States could take concrete actions to ensure the security of the assets and assure its foreign investors, as the value of US treasury bonds are guaranteed by its national credibility.

China's foreign exchange reserves stood at 2.3992 trillion US dollars at the end of 2009.