Domestic Demand Needs a Stronger Boost
The Chinese economy has met an annual growth target of around 7 percent set by the Central Government for 2015 in the past few months, with new driving forces being formed. To address the current economic risks and challenges, China must accelerate reform and opening up. In the process, there needs to be a balance between maintaining stable economic growth, advancing reforms and controlling risks.
When the economy is facing increasing downward pressure, macro controls should focus on boosting demand, especially consumer spending. This is not only a prerequisite to ensure sound and sustainable economic growth but is a feasible option for current macro-economic policy.
China's slowdown in economic growth has continued for three years in a row. In the first half of this year, the national GDP grew at 7 percent and the fiscal revenue at 6.6 percent, indicating that overall economic performance remained healthy. However, some fragile industries, such as coal, steel and real estate, as well as a number of small and medium-sized enterprises (SMEs), are struggling with difficulties. Inadequate demand has become a major element dragging down the economy.
A primary reason for inadequate demand in China is that the proportion of investment in GDP has been growing for a long time, causing a consecutive decline in the share of consumption, that of consumer spending in particular.
Within the 37 years since the policy of reform and opening up was adopted in 1978, the most significant change in the Chinese economy is that the biggest constraint has shifted from supply to demand. From 1981 to 2014, the proportion of investment in GDP in China grew from 32.9 percent to 46.1 percent, while that of household consumption declined from 53.4 percent to 37.7 percent. The significant imbalance between the contribution rates of investment and consumption has caused overcapacity. Worse still, the difference between the rapid growth of production capacity and the inadequate affordable demand of households has worsened.
In order to boost domestic demand, a proactive fiscal policy and an accommodative monetary policy are badly needed, and the latter must play a major role.
Policymakers must recognize that businesses are less enthusiastic in making investments. In the first six months of this year, aggregate social financing, including bank loans, corporate bonds and other equity financing, totaled 8.81 trillion yuan ($1.44 trillion), a decline of 1.46 trillion yuan ($239 billion) over a year ago. In the same period, fixed assets investment reached 23.17 trillion yuan ($3.79 trillion), a slight growth of 6.3 percent year on year. Owing to a decrease in investment by businesses, the amount of bank credit slid correspondingly. If a vicious circle is formed in which the economic slowdown and deflation worsen each other, the situation will become very precarious indeed. Therefore the central bank must adopt effective measures to ensure that money supply will grow at a rate faster than in normal conditions.
Since China has not completed the process of industrialization and urbanization and its economy is still in a phase of rapid growth, it is necessary that broad money (M2), which includes cash in circulation and bank deposits, grows at twice the speed of GDP growth, which can both satisfy the demand of economic development and avoid inflation. Now is the right time for the central bank to cut the bank reserve requirement ratio and the interest rate and properly increase money supply to ensure stable growth, to adjust the economic structure and to curb economic risks.
In response to rising economic downward pressure, the government must formulate targeted investment and fiscal policies to prevent bank loans from flowing into the securities market and causing capital bubbles.
Since China's national government debt is still low as a percentage of the GDP, there is much space for the country to implement a proactive fiscal policy. It should increase the issuance of long-term construction bonds, guide banks to grant loans to specific sectors through discount terms and tax breaks, and encourage private investment.
Since last year, the Central Government has launched 11 major project packages in such fields as infrastructure and public services, encouraging participation of private investment by way of franchising. Both fiscal funds and bank loans should be the main sources of input into these fields to attain the goal of optimizing the economic structure, improving the quality of people's lives and promoting the transformation of the country's economic growth pattern. To prevent these funds from being misused, the government must strengthen tracing and oversight so as to ensure bank loans are used to boost the real economy.
This is an edited excerpt of an article written by Zheng Xinli, Vice Chairman of the China Center for International Economic Exchanges, for Economic Daily
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Copyedited by Kylee McIntyre
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