By Lu Ning
18 Jun 1998
Going for expansionary
fiscal policy
Minister's stance represents a sea change at the
treasury
HINA'S normally low-key finance minister, Xiang Huaicheng,
received more attention than he had anticipated on Tuesday. His
one-line comment on the renminbi in an article published in the official
People's Daily was picked up by news wires and markets around the globe.
It didn't matter that he mentioned the Chinese currency only once and its
Japanese counterpart, not at all, in the 5,000-word article. Nervous markets
pounced on the remark, taking it as an expression of doubt over the yuan's
stability in the face of a free-falling yen.
A careful reading of Mr Xiang's article indicates that it is indeed a significant
piece, though for a starkly different reason.
The main thrust of his article was to stress that China must now turn decidedly
to an expansionary fiscal policy to jump-start the economy in order to ensure
the 8 per cent GDP growth target for the year. Otherwise, he argued,
pressure on employment, the renminbi and state enterprise reform would
mount.
What is truly remarkable is that this important message came from a top
bureaucrat whose job performance is likely to be judged by how well he
manages, as the government plan dictates, to wipe out deficit and achieve
fiscal balance by the year 2000. Remember the notorious role the Japanese
finance ministry played in dragging the Japanese economy into the current
mess?
Mr Xiang's embracing of an expansionary fiscal policy also represents a sea
change at the Chinese treasury which only three months ago unveiled a budget
that proved a disappointment to many who were looking for substance to the
much-touted three-year US$750 billion (S$1.3 trillion) stimulus package.
Unlike the chief manager of China's monetary policy -- central bank governor
Dai Xianglong who declared increasing money supply his top priority at the
parliamentary session -- Mr Xiang's predecessor adhered to a conservative
fiscal policy with a 6.8 per cent cut in infrastructure spending and only a
modest increase in treasury bill issue for 1998.
The budget also aimed to achieve a 10 billion yuan (S$2.1 billion) reduction in
fiscal deficit.
Now, Mr Xiang has argued eloquently that although steps have been taken to
stimulate consumption, expand investment and increase net exports, the effects
would take time to kick in; that even monetary policies have their limits when
an economy is in "relative contraction", as the four interest rate cuts since May
1996 have failed to provide enough of a spur.
China, he stressed, should now switch from mainly relying on monetary policy
to mainly using fiscal policy, which is far more efficient in producing quick
results, to expand aggregate demand. To his treasury colleagues, he reasoned
that a slower economy is a far greater threat to fiscal revenue under the
circumstances.
But he cautioned against tax cuts because the tax base is relatively small.
Instead, he outlined a five-point plan that stresses reducing various corporate
fees, increasing government investment spending, raising export tax rebates,
and expanding treasury bill issues.
Treasury bills hold the greatest promise. China has already announced
expanded plans for infrastructure spending. By the end of last year,
outstanding public debt amounted to less than 600 billion yuan, only 8 per cent
of its GDP. This makes the 280.86 billion yuan treasury-bill plan look too
conservative.
With falling interest rates on bank savings, treasury-bills have been hot. Some
90 per cent of the 125 billion yuan bond issue introduced in February were
sold within a month.
That prompted the finance ministry to make an additional issue in April of
17.36 billion yuan which were again sold out by the end of May.
Another issue of 45 billion yuan was added earlier this month as a result. It is
more than a little extraordinary that within four months, nearly 70 per cent of
the planned issues for the year had been snapped up.
Mr Xiang's article indicates that China for now has almost exhausted monetary
policy options with little room for more than one additional rate cut. Instead,
the government would increasingly rely on fiscal policy to drive the economic
recovery.
c Copyright Singapore Press Holdings Ltd, 1998. All rights reserved.
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