Chinese government must avoid missteps to guarantee growth

As China celebrates the arrival of the Year of the Rat, the government has taken drastic measures to cope with the aftermath of the worst snow storm the country has seen in 50 years. This has left many provinces with limited access to power, food and reliable transportation.

The measures include the ban of coal exports, capping prices of essential food and the deployment of over one million soldiers to the effected areas. "These steps indicate how seriously the government is taking the one off shock to the system for fear that it might otherwise manifest into greater political dissatisfaction," said Mike Hanbury-Williams manager of the F&C Asia Pacific Dynamic SICAV Fund and F&C Pacific Growth Fund.

Hanbury-Williams said that controlling inflation, which has recently spiked up on the back of accelerating food prices, should be a priority for the government. "Given that this is primarily the result of tightening supply, capping prices of essential items is not believed to be the way to rectify the problems," he said. "In fact our concern is that this may delay any recovery which could lead to an increase in inflation expectations feeding into wage negotiations which could ultimately be to the detriment of corporate margins and profitability."

However, aware of the rapid unravelling of excesses in the global credit markets and the negative implications for OECD growth, the Chinese authorities are showing signs of stepping back from their tight monetary stance.

"This should ensure that GDP growth momentum should sustain comfortably above 8.5% in 2008 which implies continued solid demand for resources, further expansion in the domestic labour market and on going strength in the Renminbi." Hanbury-Williams expects this environment to be conducive to further structural growth in select areas of the economy including property, healthcare, discretionary consumption, transport, energy and the environment.

"But this potential growth requires the foresight of the authorities to avoid policy missteps, something that the market has yet to be convinced of."