It's official: China's economy is slowing. This year, the mainland economy is forecast to expand 9.9% in real terms, down from 11.9% last year. The Ministry of Finance is hard at work on a fiscal stimulus package, and the State Council could approve it within a matter of weeks. A spending splurge isn't, however, the right move for China today.
As Japan learned in the 1990s, fiscal stimulus packages aren't cost-free. A large-scale spending program could waste fiscal ammunition that may well be needed in the future. What's more, China's economy is still growing at a healthy clip. Domestic demand is still pretty robust. There is strong appetite for bank loans, suggesting that the investment slowdown is caused more by the unwillingness of banks to lend, rather than any lack of investment appetite in corporate China. While China's export growth has slowed, it is still growing at 7% in year-on-year, inflation-adjusted terms. Next year's GDP growth is expected to slow to 8.6%, from this year's 9.9%.
But Beijing is under pressure from various quarters to roll out the spending as soon as possible. Policy makers who worry about unemployment will argue that spending is needed to create jobs. Businessmen who run big infrastructure projects will jump on board looking for some juicy contracts. Others argue they can stimulate private consumption with tax rebates.
Tax cuts are already in the works. These measures are meant to support long-term social policy goals however, rather than spark a short-term stimulus. The starting level for personal income tax, for instance, will likely be raised again, taking more low-income wage earners out of the tax base. Additional value-added tax rebates for exporters are also likely, given that textile exporters have already received them.
Meanwhile, more spending may well be on the way. The Economic Observer reported late last month that the nation's top economic body, the Central Economic and Finance Working Group, chaired by Premier Wen Jiabao, is considering a possible package worth 220 billion yuan ($31 billion) for the second half of the year. That's 0.7% of 2007's GDP, a sizeable chunk. But the portion reportedly aimed at infrastructure, 35 billion yuan ($5 billion), is less than 0.5% of total fixed asset investment last year. Other money has been allocated to other government priorities, including health, education and R&D.
China today is in healthy fiscal shape. Its total official outstanding debt is low, at 15.7% of GDP at year end 2007. Officially, the country ran a budget surplus of 0.7% of GDP last year. The international debt markets would certainly welcome China if it wanted to borrow there.
But that doesn't make this kind of stimulus a good idea. China certainly can do the preparatory work now, but the country would likely be better off waiting until a serious slowdown appears -- say, when the economy slows to under 8% annual growth -- before rolling out a big fiscal stimulus.
At that time, policy makers should channel money into supporting consumption, not infrastructure, as much as they can. Sure, there are areas -- like the railways and power transmission -- that need a chunk of investment. But China's greatest need is to break its reliance upon investment and transform itself into a consumer-driven economy. A spending package could help by funding social welfare, as well as the education and health sectors, to free up private income. More schools and hospitals could be built and renovated, especially in rural areas. Unemployment insurance could be expanded. The more tax breaks and transfers go to those with a greater marginal propensity to consume, the bigger the economic boost.
Beijing could also opt for a monetary, rather than fiscal, boost as its first response. If Beijing relaxed all bank loan quotas, it's likely that lending would increase dramatically to meet demand. Moreover, allowing the liquidity that has been built up on the central bank's balance sheet to leak back into the commercial financial system would provide ample low-cost capital. It is hard to imagine a U.S.-style credit crunch in China, even if property prices were to sharply correct.
China's economy is slowing for sure, but it's not falling off a cliff. The Ministry of Finance needs to weigh carefully the benefits of a fiscal stimulus package that would erode today's budget surpluses and leave China in a weaker position when the downturn really arrives. As America learned in the 1930s, and Japan more recently, big spending packages can sometimes only make things worse. |
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