By Editorial Board
Published: 2008-03-31

The growth rate of profits for enterprises has registered a new low, according to the latest official statistics. Those classified as scale enterprises, referring to both state-owned and private companies with an annual sales over five million yuan, have made 348.2 billion yuan in profit in the first two months of this year, a 16.5% growth when compared to the corresponding period last year.

This is a relatively low rate considering past years' performance. Although the rare and severe snowstorm earlier this year might be a contributing factor, we should also view this as a warning signal on macro economy controls. We believe the time has come to have balanced policies.

The Government Working Report has set this year's economic goals as maintaining growth around 8% and keeping inflation around 4.8%. How can these goals be achieved? This question has ignited fierce debates among scholars, whom we think should continue discourse in search of an answer; however, policy makers do not have the luxury of time and must come up with a clear direction promptly.

The academic debates are centered on how to maintain growth rate while taming inflation, and whether or not these two goals can be realized simultaneously. If not, which goal should be given the priority? The prolonged debates are partly due to the ambiguity in policies and objectives set by the government in recent months.

In reality, the Chinese economy is being pulled in multiple directions. For instance, it has to accomplish energy-conservation and environment protection while not hampering the pace of development; it has to promote restructuring of industrial sectors while ensuring exports would not be adversely affected. Moreover, it is burdened by fluctuating foreign exchange rate, inflation, and excess liquidity.

The current economy is like a man afflicted by multiple illnesses, each requiring unique prescriptions; and the cure for one problem may be a poison for another, thus it is difficult to disentangle the overlapping effects or to predict the outcome precisely. 

With that in mind, we think it is better for economy policies to be simple and straightforward with less short-term goals in order to act decisively. The inflationary pressure facing China is not entirely domestically-induced, instead, rising prices are imported after the price surges of global commodities. Therefore, the government's hope of intervening  in price fluctuations through supply and demand adjustments at home to curb inflation would not be realistically feasible.

Against this backdrop, if policymakers set out to cure everything at once, the move may be counter-effective. Even if China adopts more aggressive tightening controls, prices may not develop in a way it wishes; on the contrary, the controls may result in flat economic growth and worsen into a deflation.

At present, we must think of prioritization. For a newly emerging market like China, economic growth for the medium and long term is of utmost importance. The 8% targeted growth rate set by the Chinese government is unable to support job creation for tens of million of people. If the growth rate drops drastically, unemployment will be on the rise and that may lead to other social problems and destabilization of society.

In the mean time, global demand is shrinking as the US economy slows down; and if China is overly focusing on cutting trade surplus at this point, the negative consequences may be beyond its bearable limits.

The new five-year-term of Chinese government formed in March has added financial and taxation reforms into its work schedule. If the economy slips into decline, such reforms could be jeopardized. Even the short term policies, including energy conservation, environmental protection, and structural adjustments, could not be realized without riches from a healthy economic growth.

The growth in turns depended on enhancing the competitive edge of Chinese enterprises. The manufacturing industry remains the most important economic sector in China, however, under the government's tightening of controls, many enterprises are facing a tough time. In fact, coupled with the losses incurred by the rare snowstorm which struck earlier this year and government policies that overly emphasized on curbing inflation, many enterprises are on the verge of caving in.

As a result, in the first two months of this year, the growth of enterprises' profits has registered a much slower rate at 16.5% as compared to the average 36% growth rate last year. This is the reality facing Chinese enterprises today.

Premier Wen Jiabao himself said at the National People's Congress this year that China must find a balance between developing the economy and curbing inflation. In our opinion, when deciding on policies to balancing the two, priority should be given to maintaining moderate economic growth.

Having said that, prioritization does not mean to neglect the other goals, like containing inflation or pursuing conservations and reforms. However, we believe a healthy economic growth is the pre-condition to materializing these other goals.

At the same time, to cushion the negative impacts of rising costs on people's livelihood, the government should expand budget allocation for providing subsidies to the lower income group. We call for more fiscal measures and budget considerations to be applied into economic policies in the near future.