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China needs fiscal, monetary stimulus to sustain growth

Benjamin Restle / Share:

When a significant economy such as China’s faces an outlook of an evident slowdown, an economist’s common-sense response would be to ramp up the magnitude of fiscal stimulus and, simultaneously, cut taxes and fees for the middle class so they will have more in their pockets to shop and activate domestic spending.

The Ministry of Finance, authorised by the Standing Committee of the National People’s Congress (NPC), the country’s top lawmaker, has approved China’s provinces and cities to promptly sell special local-government bonds worth 1 trillion yuan ($142 billion) and the proceeds will be rushed to gear up infrastructure investment.

According to the ministry’s plan, in 2020 a total of 3.35 trillion yuan of government bonds will be sold to fund a plethora of key projects.

It is broadly expected that prefecture and county-level cities will get a bulk of the funds to ratchet up urban transport and utility facilities, including light-rail systems, water, electricity and gas supplies, 5G telecom clusters and new housing projects for locals. Also, some of the funds ought to be channeled to improve rural irrigation conditions, protecting reservoirs, river banks and ditches.

As China’s average household savings rate hovers at an elevated 45 percent now, it won’t be a problem for the wealthy urban individuals to snap up the government bonds, which often sell at a higher interest rate than commercial banks’ saving benchmarks.

History has shown that fiscal stimulus measures are very effective to ameliorate an economic slump, which the country did in the aftermath of the 1998 Asian financial crisis and the 2008-09 global financial crisis which originated from US’ subprime mortgage malaise.

Although repetitive construction and the waste of resources occurred to some extent after China’s State Council came out with a massive 4 trillion yuan stimulus in early 2009, the pump-in succeeded in giving a prompt strong shot to China’s economy which led to consecutive double-digit gross domestic product (GDP) surges from 2010 to 2013. China’s high-speed growth then also helped lift many neighbouring economies and assisted the US to walk out of its cycle of a grave recession.

Fiscal investments, if coupled with appropriate anti-cyclical monetary policy support, will be able to pull China’s economy out of its current impetus dearth, Chinese economists say.

On Nov 20, the People’s Bank of China, China’s central bank, moved to cut the year-long loan prime rate (LPR) by 5 basis points, which was the second cut this year. There is more room for LPR reductions in 2020.

The reduction of the benchmark lending rates is to aid tens of thousands of privately run Chinese businesses – a backbone sector sucking up millions of jobless labourers in the country.

A job brings an income to a household, which also converts to domestic spending power. Because China’s export volume is static this year by dint of the US government’s relentless tariffs war, growth of domestic spending, which averaged an 8.2 percent rise from January to October, fired up China’s economy to grow at above 6 percent this year.

If the gross retail spending keeps growing at around 8 percent in 2020 – that must be accompanied by a steadfast rise in wages – the prospect for next year’s GDP growth will be rosy because Chinese middle class people are expected to keep buying Huawei 5G smartphones, stylish German and Japanese cars, high-end French cosmetics, Russian vodka and yummy fruits produced in Southeast Asia.

To shore up the Chinese people’s buying capability and the allure of the Chinese market, the central government needs to continuously reduce personal income tax rates on individuals who earn 5,000 to 50,000 yuan per month, while hiking levies on the millionaires and billionaires. China must make all efforts in its capacity to nurture an equitable society – backed up by a growing army of  middle-class shoppers who will make the most powerful and durable cushion to sustain GDP growth.

The author is an editor with the Global Times. GLOBAL TIMES


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