Proactive fiscal policy being phased out
By Xu Dashan (China Daily)
Updated: 2004-06-14 08:30

China is likely to cut back on the issuing of special bonds used to spur growth this year as the country tries to avoid overheating, economists say.

Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences, said there was a big possibility that the government would cut down issuing such bonds by as much as 30 billion yuan (US$3.6 billion) this year.

"The government will speed up phasing out proactive fiscal policy to cool down the economy," Yuan said.

China's economy grew a year-on-year 9.8 per cent during the first quarter.

But surging investment growth and rising demand for energy and raw materials prompted concerns that the economy might suffer from overheating again.

Finance Minister Jin Renqing said late last month that the government would adopt a neutral fiscal policy to reduce the risk of inflation.

This was the first official signal that the government would phase out proactive fiscal policy, Yuan said.

Zhang Xueying, a senior economist at the State Information Centre, said adoption of the neutral fiscal policy meant financial expenditure, especially on infrastructure construction, would be reduced.

This was good for China's current economic situation, which faced the risk of becoming overheated, he said.

"If the nation's economy grows 8 to 9 per cent and its consumer price index rises more than 5 per cent this year, the government will further reduce or even stop issuing the special bonds next year," Zhang said.

Wang Zhao, a researcher at Development Research Centre under the State Council, said a departure from proactive fiscal policy was necessary, because the government should reduce reliance on its monetary policy to adjust the economy.

"Overuse of monetary policy will hit market forces," Wang said.

Niu Li, an economist with the State Information Centre, said there were already signs that the government has begun to fade out proactive fiscal policy.

For example, the government has cut the amount of special bonds by 30 billion yuan (US$3.6 billion) this year to 110 billion yuan (US$13.3 billion).

This year's budgeted deficit keeps to the same level as that of 2003, which stood at 319.8 billion yuan (US$38.5 billion).

But the proportion of the budgeted deficit to gross domestic product (GDP) dropped from 2.9 per cent last year to 2.5 per cent this year.

The proactive fiscal policy was introduced in 1998 to minimize the negative fallout from the Asian financial crisis.

The policy was characterized by increasing government expenditure mainly on investment in infrastructure projects.

Yuan said proactive fiscal policy has played an important role in fuelling the country's economic development.

But as the economy begins to heat up, the active role of the government investment has begun to lessen, he said.

The weakness of government investment in low efficiency projects had begun to loom, he said.

Proactive fiscal policy also failed to pay adequate attention to public affairs such as public health, social security and environmental protection.

"State financiers should pay more attention to solving problems which can not be solved by the market, including public health, social security and environmental protection, while government expenditure directed at expanding demand should be reduced," he said.

The fiscal policy should help create a good environment for companies, especially private companies, so that market factors could play a more important role, he said.

Zhang Peisen, a senior researcher with the Taxation Research Institute of the State Administration of Taxation, said the country could not implement pro-active fiscal policy long-term.

Extra, heavy government debt, that could possibly be brought about by proactive fiscal policy, would cast a shadow over future economic development, he said.