November 2, 2011 / 4:51 AM / 8 years ago

WRAPUP 1-Chinese economy on track despite risks -Vice FinMin

* Economic growth still relatively fast

* Commodity prices, protectionism external risks

* Will follow path of policy flexibility

* Will work with Europe on debt crisis

By Kevin Yao

BEIJING, Nov 2 (Reuters) - China’s economy is on the right track and the government will take a flexible policy approach to dealing with the risks it faces, Vice Finance Minister Li Yong said on Wednesday.

He singled out global inflation pressures that would likely extend into next year, adding prices were still elevated in China, and said the world’s second-biggest economy faces rising protectionism and foreign exchange volatility.

“China’s economy continues to move in the right direction. Growth is relatively fast,” Li said, speaking at a conference organised by Bank of America/Merrill Lynch.

He said macro-economic policies will be more “forward-looking and flexible” to deal with any difficulties ahead.

Li’s concerns about external conditions were echoed in separate comments by a vice chairman of China’s top economic planning agency, the National Development and Reform Commission.

“Commodity prices in the international markets may become more volatile next year,” Peng Sen said in a statement on NDRC’s website (www.ndrc.gov.cn).

International commodity prices are a key area of concern for Chinese policymakers given the country’s huge consumption and imports of raw materials.

Peng was more sanguine about China’s inflation risks, saying he expected the headline consumer prices index to ease further in the coming months.

“At present, prices are stabilising and are under overall control,” Peng said. “China’s CPI has peaked at 6.5 percent in July before easing to 6.2 percent in August and 6.1 percent in September, and we are expecting to see a further fall in the coming period of time.”

PATCHY ECONOMIC DATA

Recent data on the Chinese economy has been patchy.

GDP grew 9.1 percent from a year earlier, the third consecutive quarterly slowdown in growth after 9.5 percent growth in the second quarter and 9.7 percent in the first.

Other figures suggest the domestic economy is growing healthily. Fixed-asset investment, the main driver of growth in the world’s second-biggest economy, and retail sales — published alongside GDP — were stronger than expected .

Meanwhile China’s official purchasing managers’ index (PMI) on Tuesday fell to 50.4 as big manufacturers ran at their slowest pace in October since early 2009. The National Bureau of Statistics blamed the drop on weak European and U.S. economies .

There were signs of a bounce-back at smaller firms in a private sector PMI survey, by HSBC and data firm Markit, rising in October to 51.0 from 49.9 in September, its first rise above 50 that demarcates contraction from expansion since June.

Exporters have struggled as the global economic backdrop has darkened. Exports were a net drag on China’s economic growth in the first nine months of the year, and Li said firms in the sector faced difficulties from a combination of appreciation of the yuan currency and protectionism.

The yuan has gained around three percent this year versus the dollar, continuing a trend that has seen it rally about 40 percent in real inflation adjusted terms against the greenback since a July 2005 landmark revaluation.

Some international economists believe China may be preparing to slow that appreciation, given the external economic risks, repeating action taken at the peak of the 2008/2009 global financial crisis when the yuan was essentially put on hold before being released again in mid-2010 .

China’s sensitivity to the currency issue — and criticism of its foreign exchange regime — was highlighted in a commentary on Wednesday by the state news agency, Xinhua, headlined: “Targeting yuan is no antidote to global economic woes”.

Li said the government’s pro-active fiscal policy since the global financial crisis had not only supported infrastructure projects but also helped curb inflation by boosting the supply of agricultural products.

He said the government would spend more on low-cost housing projects and tax cuts for the service industry and that Beijing needs to deepen fiscal reforms. China raised the threshold for value-added and business taxes on Monday in a move seen as an effort to support small and medium-sized businesses.

The recent run of data reinforces the consensus view that Chinese interest rates will remain on hold as Beijing balances a fight against inflation with concerns that growth is slowing.

Many investment bank economists believe China will conduct more fine-tuning via a policy of so-called selective easing to help specific sectors of industry.

Li, meanwhile, played down the risks surrounding local government debt and Chinese banks’ exposure to possible bad loans, two areas of concern to international investors.

BIG REAL ESTATE RISKS

Li said China was alert to risks in the domestic property market, where prices in key cities across the country have risen 10-fold in the last 10 years, fuelling a speculative bubble and public discontent as ordinary working families have been priced out of the market.

“China faces big risks in controlling the property sector,” he said, adding that China will not repeat other countries’ failure in warding off property bubbles.

The popping of the U.S. real estate bubble triggered the global financial turmoil of 2008/2009, fallout from which set off Europe’s debt crisis.

Europe — China’s largest export market — is still struggling to resolve its debt problems, leading many investors to believe external risks to the Chinese economy are high.

Li said China would work with other countries and multilateral lenders, the International Monetary Fund and the World Bank, to help Europe cope with its debt crisis.

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