To offset financial crisis by boosting domestic demand
BEIJING: China has said it would loosen credit conditions, cut taxes and embark on a massive infrastructure spending programme in a wide-ranging effort to offset adverse global economic conditions by boosting domestic demand.
This is a shift long advocated by analysts of the Chinese economy and by some within the government. It comes amid indications that economic growth, exports and various industries are slowing.
A stimulus package estimated at 4 trillion yuan (about $570 billion) would be spent over the next two years to finance programmes in 10 major areas, such as low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters, notably the May 12 earthquake.
The policies include a comprehensive reform in value-added taxes, which would cut industry costs by 120 billion yuan. Commercial banks’ credit ceilings would be abolished to channel more lending to priority projects, rural areas, smaller enterprises, technical innovation and industrial rationalisation through mergers and acquisitions. The decision was announced on Sunday by the State Council, or Cabinet, after Premier Wen Jiabao presided over an executive meeting on Wednesday.
Saying credit expansion must be “rational”, the meeting decided “target spheres that would promote and consolidate the expansion of consumer credit.” With 100 billion yuan from current-year central government funds and another 20 billion yuan brought forward from next year’s budget for post-disaster reconstruction, the fourth quarter is expected to see an investment of 400 billion yuan across the nation.
The spending plan was expected to play a role in sustaining growth as 4 trillion yuan investment is an equivalent of one third of the nation’s total fixed asset investment last year, according to Zhang Liqun, researcher with the Development Research Centre of the State Council. “With the deepening of the global financial crisis over the past two months, the government must take flexible and prudent macro-economic policies to deal with the complex and changing situation,” said the meeting.
The meeting also announced that China would adopt “active” fiscal and “moderately active” monetary policies and map out more forceful measures to expand domestic demand, speed up the construction of public facilities and improve living standards of the poor to achieve “steady and relative fast” economic growth.
The active fiscal policy alone would not bear much fruit without the coordination of easing monetary policy.
The two should work together to confront the economic complexity of home and abroad, said Yuan Gangming, researcher with the Centre for China in the World Economy of Tsinghua University.
The policy change comes out in time as the global financial crisis begins to affect China’s real economy. The adjustment is more resolute and timely as China draws lessons from the Asian financial crisis in 1998, said Jia Kang, director of the Research Institute for Fiscal Science of Ministry of Finance. He noted the policy was expected to prevent big fluctuations in the economy. He said the value-added tax reduction would encourage enterprises to invest more in the long run.
The macro-economic policy changes announced on Sunday are one of only a few major shifts during the 30 years since the beginning of reforms. The most recent modification was in December, when the government resorted to a combination of “tight” monetary policy and “prudent” fiscal policy to fight inflation.
With the monthly consumer price index, the main gauge of inflation, expected to drop further through the year-end — after plunging from a 12-year high of 8.7 per cent in February to 4.6 per cent in September — the focal task of macro-economic control has shifted from beating inflation to sustaining economic growth.
The past three months have seen a series of stimulus policies: interest rate cuts, lower bank reserve requirement ratios, tax changes, higher credit quotas and the injection of central government funds to infrastructure construction.
The meeting decided that higher investment must be able to facilitate economic restructuring, promote growth potential by channelling investment to where it is most needed and spur consumption. Though the economy has maintained double-digit growth, fixed-asset investment and exports have dwarfed consumption. With global recession clearly in view, China must sustain itself by exploiting the domestic market to offset weaker demand abroad.
The meeting identified the world economic adjustment as an opportunity for China to speed industrial restructuring, introduce advanced technologies and talents from abroad. — Xinhua