Fiscal stimulus could be the only answer to China’s prayers – opinion

Recent adjustments in monetary policy have failed to boost the country’s economic growth. The authorities must focus more on fiscal policy measures to boost domestic demand instead.

  • 09 Aug 2012
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It is believed that China still has plenty of ammunition left to bolster its economy in times of slowing growth and mounting global uncertainty. But this is uncertain and the willingness of Beijing to conduct such measures is uncertain.

Before turning too drastically to major monetary stimulus or huge spending programmes, the government could try some fiscal stimulus efforts to bolster its weakening economic growth.

Judging by the People’s Bank of China’s (PBoC) second quarter monetary policy implementation report released on August 2, the market can expect Beijing to adjust policies when needed to stimulate growth – what is also known as pro-growth pre-emptive policies.

This appears an ideal time to do so, given that gross domestic product (GDP) growth continued to slow to a three-year low of 7.6% in the second quarter.

But such easing will only happen as long as inflation and property prices remain under control. The central bank, in the report, also warned that the impact of expansionary policy may wane in stimulating growth.

So far China's focus on fine-tuning monetary policy – which involved a cut in its one-year lending and deposit rates by 31 basis points (bp) and 25bp respectively to 6% and 3% in July 5 – has failed to produce any appreciable return in the form of improving gross domestic product growth.

The latest moderation of Purchasing Managers Index (PMI) readings still suggests ongoing slowdown of demand due to weaker external orders. The China HSBC services PMI stood at 52.3 in June, down from 54.7 in May, indicating a marginal expansion of activity that capped job creation at a three-month low.

China’s industrial output expanded to 9.5% year-on-year in June, a pace slower than May’s 9.6%, according to the National Bureau of Statistics (NBS). The slowing economy undermined industrial profits in the world’s second largest economy, with national industrial profits falling 2.4% on a yearly basis to Rmb1.84 trillion (US$290.9 billion) in the first five months of the year.

It appears that rate cuts alone are not proving sufficient to accelerate business growth. So China needs to look at other means of incentivising them. A key means to do so would be to aggressively tackling fiscal policies.

As things stand in china, many private sector companies have altogether lost interest in investing in the real business due to over-capacity and surging costs. Their apathy comes in part from the deteriorating local economic situation, and in part from a feeling that state companies inevitable dominate the most promising areas of the economy, and are prioritised by both the government and banks when it comes to contracts and funding, respectively.

To encourage investment and undercut the spectre of inflation China should encourage more competition in its sectors. The easiest way to do that is to prune back its state-owned enterprises (SOEs).

The easiest way to begin would be to cut their monopoly in the service sector, in area in which the private sector remains keen to invest. Alternatively Beijing should open up more sectors for private investment.

Or the government could adopt of buyer-friendly policies instead, making more tax breaks to private investors and small local firms, especially in the service sector.

Doing so would promote more spending and investment. It would also spur China’s domestic loan market, which slightly improved in June after the country embarked on its monetary easing stance.

New renminbi loans in June totalled Rmb919.8 billion (US$145.5 billion), up from Rmb793.2 billion in May, according to the PBoC in July.

Other short-term ‘mini-stimulus’ that the government could embark on would include improving competition within housing, healthcare, consumer and durable goods. The costs of all of these are skyrocketing, again raising fears of inflation, but greater competition should act as a break on such increases.

That would of course take time. So in the short-term, Beijing could offer households one-off subsidies to such goods to spur their buying.

Increasing education prices are also sapping Chinese households' purchase power, directly discounting the intended effect of the central government's efforts in prodding at the dormant domestic consumption. Temporary subsidies, combined with efforts to bolster schools and colleges, would be sensible too.

These efforts would end up being far more sustainable for China’s economy than Beijing’s traditional focus on investment. Investing into infrastructure projects such as railways, expressways and energy projects can make sense and improve the health of an economy, but they are ultimately one-off investments.

Additionally, decades of frenzied investment into industrial projects has resulted in investment inefficiencies and led to a worrying addiction to investment rather than consumption as a means of propping up GDP growth.

Yet such policies have once more become Beijing’s reaction to the economic slowdown. The Second Quarter Monetary Policy Report noted that big state investments are once more being relied upon to drive China into an economic recovery. Such efforts worry market participants, who fear a repeat of China’s response to the 2008-2009 global financial crisis, when unrestrained government spending left a pile of bad debt estimated at between Rmb2 trillion-Rmb3 trillion (US$313.4 million-US$471.6 million).

It is no surprise that China is counting on the quick, short-term fix of an investment boost to lift growth, but the only way the nation can reliably boost its economy is to effectively balance its pro-growth pre-emptive monetary policy stance with longer-term constructive fiscal policies. Short-term investment efforts cannot do the job forever.

  • 09 Aug 2012

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