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China likely going for ‘micro-stimulus’
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ONE of the fallouts of the 2008 financial crisis is that Chinese are wary of the word “stimulus,” for it conjures up unpleasant memories of the 4 trillion yuan (US$646 billion) stimulus money being splurged on wasteful projects.
Yet at a time when the world’s second-largest economy is experiencing a marked slowdown, it is wrongheaded to reject stimulus altogether, said renowned economist Jia Kang.
The director of the Institute for Fiscal Science Research, a think tank affiliated with the Ministry of Finance, recently spoke at the SNAI-ASU forum held at Shanghai National Accounting Institute. ASU stands for Arizona State University.
News of the Chinese growth rate sliding to 7.4 percent in the first quarter sent jitters throughout the business community, but the wave of pessimism about China’s economic prospects is misplaced, said Jia. He said the falling GDP growth, once a vaunted indicator, should be less of a concern because Chinese leadership has trimmed growth forecasts to “around 7.5 percent” this year — a significant move that Jia interpreted as a sign of increasing flexibility.
After bao ba, to preserve the 8 percent growth rate, is no longer an official mandate, there will be more tolerance for GDP rates to moderate, Jia said.
That said, there is still a widely recognized limit to official tolerance of declining GDP, which would hurt market confidence if it fell below 7 percent.
Jia believes that although the authorities didn’t spell out that consensus, they are actually moving to gear up the economy, through adopting what is now referred to as “micro-stimulus.”
While a massive stimulus may have fallen out of favor, a smaller one is in line with Premier Li Keqiang’s remarks that “as long as the macroeconomic performance is within acceptable levels, we will definitely not adopt a massive stimulus package,” said Jia.
According to Jia, the stimulus in question is already more or less in place, following recent news reports that the National Development and Reform Commission, the economic planning body, had approved increased outlays for China’s high-speed trains from over 600 billion yuan to 800 billion yuan this year.
It has sent a signal that China is adopting an expansive fiscal policy to stimulate the economy, Jia observed.
As for the monetary policy, the People’s Bank of China has twice lowered the reserve requirement ratio — the amount of money banks are required to set aside — suggesting more of such easing measures to come, according to Jia.
He said he believed that China has a big chance of attaining the year-round growth target of 7.5 percent provided that no big economic vagaries occur.
And in an interconnected world, China’s major trade partners — the United States, Japan and the EU — have all fared better economically, meaning that the external uncertainty that might complicate Chinese economic policies is so far non-existent, Jia told the forum.
Preparing for the worst
Jia might have well ended his speech on a note of optimism, but he said it is a Chinese tradition to prepare for the worst. In the worst-case scenario, in which China’s economy could be confronted with a crisis of a magnitude on par with the 1997 Asian financial crisis and the 2008 financial meltdown, how China would cope is of great significance to itself and to the rest of world, said Jia. The Chinese leadership has generally chosen to leave it up to the market to decide that the fittest will survive and obsolete industries be phased out.
The current adversity will only help the Chinese economy grow and emerge stronger, said Jia. If the state has to intervene at all, in the case of worsening economic woes, Jia argued that it would have to mainly spend its way out of trouble. Part of its expenditures can go to revamps on public transport infrastructure in first-tier cities, Jia said.
Take Beijing, a city often mired in congestion. Medium snowfall would bring its traffic within the Fifth Ring Road to a standstill.
The real effective way to address the issue is not to rule by fiat — most typically the odd-and-even number plate policy that allows cars on roads on alternate days — but to accelerate construction of enormously extended transport networks as advanced as those in New York, Tokyo, Paris and Munich, Jia said.
As a major contributor to congestion and pollution, use of cars for commuting ought to be discouraged by revamping Beijing’s antiquated subway system along the lines of Tokyo’s, which is well-planned and highly integrated, Jia told the forum, adding that this facelift will cut cement and steel inventory.
He also observed that it will do no harm to rev up investments in rural irrigation works. Plans have been made in the past few years for a 4 trillion yuan investment over a period of 10 years. Now it’s time to deliver on it.
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