Strong Stimulus Should Be Ruled Out
Although Chinese Premier Li Keqiang had predicted fluctuations in the economic data for August during his speech at this year's Summer Davos forum held in Tianjin from September 10-12, the figures for some macroeconomic indicators that were published right after the forum have surprised many.
Industrial output rose 6.9 percent year on year in August, the slowest pace since December 2008. Electricity generation dropped 2.2 percent, marking the first decline this year. Fixed assets investment, an important driver of the economy, slowed to a 14-year low of a 16.5-percent growth rate in the first eight months. These data mark the country's worst monthly economic performance since the 2008 global financial crisis.
Chinese leaders have already braced themselves to deal with the fluctuations in macroeconomic indexes. As for the economic performance in the first eight months, Premier Li pointed out that the economic growth remained within a reasonable range amid mounting downward pressure. Notably, 10 million new jobs were created in the first eight months, a figure close to the total growth goal for the entire year. He maintained that the key to steady economic growth lies in the government's endeavor to push forward reform and structural adjustments instead of adopting strong stimulus measures or easing monetary policy, especially the efforts in streamlining administration and delegating powers to the lower levels of government, which have positively boosted the economy. Newly registered enterprises increased by 61 percent year on year from March to August thanks to the reform of the industrial and commercial registration system. He stressed that the economy has entered a "new normal" and we should pay more attention to addressing long-term problems rather than being overly concerned with small fluctuations in individual economic indicators within a short period of time.
Faced with the recent massive slide in economic indexes, the Chinese Government has not resorted to the old path of stimulus. Premier Li has repeatedly declared that China will not take massive stimulus measures. However, voices from domestic and foreign institutions and local governments still proclaim loudly that the top leaders should do exactly that to stabilize economic growth. Such a view betrays an inadequate understanding of the new cycle of the Chinese economy. Meanwhile, certain parties, perhaps understandably, remain skeptical of Chinese leaders' ability to realize sustainable economic growth through reform. In the past, companies and local governments became all too accustomed to relying on the Central Government's stimulus measures to deal with economic fluctuations. Such heavy reliance on government "paternalism" is ingrained into the souls of many.
Although top leaders have vowed not to adopt massive stimulus measures multiple times this year, many people have not taken it seriously. Those used to a seemingly unstoppable high growth rate in the past have had difficulty accepting the slowed growth since the Chinese economy entered its "new normal." Some insist that the 7.4-percent growth in the first half of the year is not good enough and that economic growth will soon bounce back to levels of above 8 percent in the near future. Such predictions are palpably unrealistic.
The drop in the August economic indexes represents a cyclic fluctuation and indicates that solely taking massive stimulus measures without addressing the underlying structural problems will only temporarily stabilize the economy and bring it back to the brink of crisis state once the short-run effects of the measures have subsided. Massive stimulus measures not only do little to solve the deep-seated paradoxes and problems inherent to the macroeconomy, or indeed to stabilize it, but will instead worsen the problems and complicate the macroeconomic situation, causing economic turbulence.
In spite of the stark decline in economic indicators in the first eight months of 2014, systematic crises and large-scale unemployment have not emerged because reform measures have reduced downward risks.
Therefore, what companies and citizens need to worry about are not short-term dips in growth but the failure to implement existent reform measures. For the Chinese economy, the most important indicator is the level to which reform is implemented.
Unless remarkable breakthroughs in the reforms of the financial industry, state-owned enterprises, land use rights and the permanent household registration system can be achieved this year, this country's economy may face some truly harrowing prospects.
This is an edited excerpt from an article by Ma Guangyuan, an independent economist, published in Economic Information Daily
The year-on-year contraction of China's power consumption in August, which is in stark contrast to the 3-percent rise recorded in July and the 5.9-percent increase in June
The year-on-year growth rate of China's fiscal revenue in August, which slowed from the 6.9-percent rise seen in July
The year-on-year increase in China's automobile sales in August
The year-on-year growth rate of urban fixed-asset investment in the first eight months
The year-on-year growth rate of private investment in fixed assets in the first eight months
The year-on-year growth rate of retail sales of consumer goods in August
The amount of money Beijing Agricultural Investment Fund has committed to investing in the Australian dairy, beef, lamb and aquaculture industries
"It is not time for an interest rate cut. That sends a strong signal to the market, and we should refrain from using it as much as possible. The central bank has an ample number of tools to employ, such as targeted reduction of reserve requirement ratios and open market operations."
Chen Yulu, President of Renmin University of China and member of the Monetary Policy Committee of the People's Bank of China, speaking to Shanghai Securities News about the downward pressure on economic growth which the country is facing
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