【Ｇｌｏｂａｌ　Ｅｃｏｎｏｍｉｃ　Ｒｅｖｉｅｗ】 Economic policy

　　The growth of the global economy slowed in 2005 after sizzling expansion the previous year. According to the forecast of the International Monetary Fund (IMF) in September 2005, the growth rate of the global economy in 2005 would drop to 4.3 percent from 5.1 percent in 2004. Although the IMF said in December it would raise its prediction, sources estimated that the adjusted rate would hardly surpass 4.6 percent. Despite the impact of global economic disequilibrium and surging oil prices, the world economy has performed well beyond the expectations of many economists and officials by running at speed, yet avoiding turbulence and crisis. According to the analysis of many international research organizations, including the IMF, the steady development of world economy in 2005 mainly benefited from prudent and appropriate monetary and fiscal policies, as well as an easy international financial environment and improved corporate balance sheets.
　　
　　While the overall global economy kept a relatively high growth, various countries featured strikingly different development. In the United States, where oil prices and deficits ran high, inflation was dampened and foreign capital maintained its momentum thanks to prudent interest rate rises adopted by the Federal Reserve. Meanwhile, exports increased partly due to a depreciating dollar and U.S. fiscal expenditures expanded after Hurricane Katrina devastated the south. All these factors combined to help the United States stabilize its prices and maintain a steady economic growth.
　　Baffled by internal structural problems and fiscal policy conflicts, the economic growth of euro zone countries was lackluster. The surging oil price and a weakening euro to the dollar in 2005 brought enormous risks to the economic operation of the euro zone, which not only dampened consumption and investors’ confidence, but also inflicted more risk of inflation. All this has made it even more difficult for euro zone countries to decide on their monetary policies.
　　In Asia, Japan gradually extricated itself from deflation through its extremely loose monetary policy, and the depreciating yen also promoted its exports. Thus, its overall economy maintained the momentum of growth though prices continued sliding. China successfully cooled its overheating economy through tight monetary and fiscal policies, and the growing domestic demand and exports propelled its rapid economic development.
　　
　　
　　Losing equilibrium
　　
　　During the past few years, the U.S. trade deficits and the uneven development of the global economy remained the focus of worldwide attention. In 2005, neither the potential threat of global economic disequilibrium nor big financial turbulence, even global economic collapse, came true. But the U.S. trade deficits and the global economic disequilibrium didn’t improve though the world witnessed a weakening U.S. dollar, an adjusted Chinese yuan and economic policy amendments of various countries.
　　But the dollar and the adjusted exchange rates of relative countries have exerted positive influences on U.S. exports. Since 2003, U.S. exports have increased steadily. In 2004 and 2005, the growth rate of U.S. exports stood at 8.4 percent and 8.2 percent, respectively. Meanwhile, U.S. import growth declined by a large margin, reaching 6.6 percent in 2005 against 10.7 percent in 2004. Under these circumstances, how to adjust the savings and fiscal revenue and expenditure policies of various countries has become the key to address the global economic disequilibrium.
　　In 2005, though facing potential risks of the U.S trade deficits and global economic disequilibrium, the dollar reversed its sliding momentum and began to appreciate against such main currencies as the yen and euro. This is because the Asian central banks purchased a great deal of dollars, leading to a large amount of foreign reserves of Asian countries flowing to America. Meanwhile, thanks to a sound domestic economic situation, American assets remained attractive to private investors, resulting in the inflow of a huge amount of private capital. But this would aggravate the risk of global economic disequilibrium and adjustment. The inflow of official reserves and private capital would also interfere with the dollar’s adjustment. Meanwhile, the inflow of a large amount of external capital would be unfavorable for America’s internal savings and revenue and expenditure policy.
　　
　　
　　Oil impact
　　
　　In 2005, international oil prices continued to soar, bringing enormous risks to the operation of the economies of various countries and the global economy as a whole. As oil demand worldwide has surged over recent years, the gap between production and demand has gradually been narrowed. After 2004, the daily gap was reduced to less than 2 million barrels. The continuous growth of the world economy, especially the rapid expansion of emerging markets, heavily dependent on oil imports, further intensified the expectation of an oil demand increase.
　　Oil supply insufficiency was mainly to blame for the oil price rise in 2005, and the short-term impact of Hurricanes Katrina and Rita on global oil demand further drove up the oil price. In June 2005, the oil price on the international market surpassed $60 per barrel and in August it rose further to top $70.
　　
　　So far, the international oil price hike has not produced huge negative impacts on the economies of various countries and the global economy as a whole. Or at least it’s safe to say that the negative impact of the surging oil price has not displayed entirely. The success of the global economy in dealing with the oil price rise in 2005 benefited from the following policies-increasing investment in the energy industry, improving oil exploitation capacity, promoting investment in oil conservation and alternative energy resources, increasing oil reserves, and introducing prudent monetary policies to pin down the expectation of inflation sparked by soaring oil prices. All these factors have made it possible for the global economy to shun the negative impact of a rocketing oil price.
　　However, if the oil price continues to hover high, both producers and consumers would adjust their behavior, thus leading to salary and price rises and further to serious inflation. In this case, economic growth might be eroded. For those developing countries and regions that rely on oil imports, particularly, ongoing oil price rises would deteriorate their balance of payments, possibly giving rise to an overall financial and economic crisis.
　　
　　Challenges for China
　　
　　In 2005, the economic growth in China maintained a good momentum. As macro-economic adjustment measures gradually took effect, the pressure of inflation was eased. The country’s gross domestic product (GDP) for the year is expected to rise by 9.4 percent, and the inflation rate to stand below 3 percent. The most worrying problems at the beginning of 2005--an economic slide and inflation escalation--didn’t happen. Despite many disadvantages, such as global economic disequilibrium, a property bubble, surging oil prices and foreign exchange rate adjustment, China achieved continuous and steady economic growth.
　　But many contradictions and risks also hide behind China’s economic growth. At the beginning of 2005, China initiated overall macro-economic adjustment measures, such as tightening the monetary policy, checking on investment and adjusting fiscal expenses, to deal with the inflation sparked by overheated investment. By November, however, fixed asset investment still had grown by 27.8 percent, only 1.1 percentage points down from the same period of 2004. The hovering investment growth rate made it hard for China to get rid of the threat of inflation in the short term. In 2006, China is expected to completely open its financial sector. If inflation does show up in 2006, it would pose great challenges to China’s economic stability and growth.
　　In July 2005, China revalued the yuan against the U.S. dollar and introduced a currency basket to determine the exchange rate against the previous dollar peg. While such an adjustment has helped to relieve the pressure on the yuan, it did not exert a noticeable impact on the domestic financial system.
　　However, as the global economic disequilibrium remained serious and China’s trade surplus continued to widen in 2005, the international pressure on the yuan adjustment and the demand for a more flexible yuan will make a comeback soon. The adjustment in foreign exchange and the capital account management system arising from it will test China’s policy makers and financial departments. Meanwhile, China’s widening trade surplus will also result in more trade frictions and conflicts, sparking arguments from the international community on the strategy and mode of China’s economic growth.
　　As China’s financial sector will be fully opened in 2006, speculative capital will definitely find more access to the Chinese market, placing more pressure on the country’s financial and monetary stability and leaving less room for policy regulation.

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