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China is likely to give up its proactive fiscal policy and implement a neutral policy next year, according to several leading economists.
They also expect the country to reduce the amount of special treasury bonds it issues. The government has used these to fuel its fiscal expansion.
Peng Longyun, a senior economist with the Asian Development Bank (ADB), said implementation of a neutral fiscal policy means that the government will reduce the ratio of deficit to total gross domestic product. It will also adjust the structure of fiscal expenditure.
Wang Zhao, a senior researcher with the State Council Development Research Center, said the phasing out of the proactive policy is urgently needed.
"Long-term reliance on the policy would be harmful to the sustainable development of the country's economy," he said.
The proactive fiscal policy, characterized by increasing government expenditure mainly on infrastructure projects, was introduced in 1998 to minimize the negative impact of the Asian financial crisis. It has played an important role in speeding infrastructure construction, expanding domestic demand, increasing employment and fueling the country's economic development.
But since the beginning of this year, investment in fixed assets has been excessive and inflationary pressure has increased.
"The proactive policy partly fueled overheating in industries such as cement and steel," Wang said.
He pointed out that if the government had disengaged earlier from this policy, it would not have had to launch this year's raft of macroeconomic control measures to slow excessive growth.
"The time is ripe for the government to let the proactive fiscal policy fade out," he said.
The ADB's Peng said that the government may hold the deficit level with this year's, but as GDP continues to grow the deficit ratio will drop.
Wang expects the government to cut the actual deficit/GDP ratio to about 2 percent next year from the 2.2 percent predicted for this year. In the absence of sharp fluctuations in the economy, he believes that the ratio may be cut to about 1.5 percent within a few years.
Peng noted that a more neutral policy does not mean an inactive one.
"The neutral policy should beef up its role of structural adjustment in the government's macro-control efforts, in cooperation with the monetary policy," Peng said. For example, an interest rate hike may not have sufficient impact on the overheated sectors, but it will be felt in the agriculture sector and by small and medium-sized companies.
The government could carry out fiscal measures such as imposing an energy tax to alleviate the pressure on energy and could offer interest subsidies for agriculture. Since the government encourages the development of small and medium-sized companies, fiscal expenditure could help to improve their business environment and services offered to them.
Also, said Peng, more emphasis should be given to poverty relief and rural education.
Peng said China does not have fiscal risks at present, because the country's debts are not very big, but this does not mean the country is free from worries. The huge amount of nonperforming assets held by state-owned enterprises and the need to develop its fledgling social security system are cases in point.
Niu Li, a senior economist with the State Information Center, noted that the government also needs money to complete unfinished infrastructure projects and to support its efforts to develop old industrial bases in the country's northeastern regions. Thus, it will likely continue to issue special treasury bonds next year, although a smaller amount than in the past.
(China Daily November 29, 2004)
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