Economic Uncertainty and Policy Risks
Chief Economist, JP Morgan in China
The author does not agree with the view that RMB exchange rate should be revaluated with a once-time large adjustment. The drawbacks of this suggestion are that there is no way to calculate the equilibrium exchange rate and that enormous trade surplus in China can come from different sources: besides undervalued RMB exchange rate, undervalued resource prices may be the major factor. Therefore, resource prices should be liberalized first.
Temporary price interventions are frequently used this year, but they must be accompanied with many other costly interventions to work. If price interventions work, shortage economy will come back, which is not what we want. China has made great efforts to escape from shortage economy in the past three decades. For example, price liberalization was realized in late 1980s despite the pressure of high inflation. Current macroeconomic circumstances are much better than the past, and China should have the nerve to liberalize resource prices. If so, economic uncertainty and policy risks will decrease substantially, and stock market will make positive response as well.
Since consumption has not become the leading driver of economic growth, policies should focus on infrastructural investment. In previous years when economy was booming, the decline of governmental role in investment was understandable. At present, however, it is the golden time to increase governmental investment in urban infrastructure such as subway system.