China's 'deficit economy' phasing out

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Last updated at: (Beijing Time) Thursday, March 11, 2004

China's 'deficit economy' phasing out

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The budget report made by Jin Renqing, China's finance minister, at the Second Session of the 10th National People's Congress on Mar. 6, 2004 indicated the attractive tendency of changes in financial deficit.

China's financial deficit has topped 300 billion yuan for three years in a row and reached 319.8 billion yuan for two straight years, setting two record values since the founding of the PRC.

However, a further analysis shows that the color of the "deficit economy" is fading away from China's economy. This finds expression in the fact that the proactive fiscal policy with the government direct investment as the economic engine will gradually get out of the center stage. One of the indicators is that the long-term treasury bonds issued in 2004 are equivalent to that in 1999.

Meanwhile, more noteworthy is that after touching the internationally recognized deficit bottom line, namely 3 percent of GDP, the ratio of China's financial deficit to GDP has dropped to 2.5 percent from 2.9 percent in 2003. The ratio of liabilities, (the ratio of the balance of the treasury bonds to the GDP), has never surpassed the 60 percent safety line over the past five years.

The deficit finance faded away against specific macro-economic policies and background.

Firstly, China's economic aggregate is fast expanding under the impetus of rapid economic growth. Even if the same tax rate is maintained, the expansion of the economic scale will naturally boost the growth of tax revenues. In this sense, such growth is supported by the reality of China's ability to control the expansion of financial deficit, besides curbing the swelling of financial expenditure, the crucial factor is to maintain a stable and relatively fast economic growth.

Secondly, the independence and inherence of China's economic growth has been enhanced. Now the main driving force for China's economic growth is not governmental investment, but is private investment and residential consumption. The further progress in urbanization and industrialization has made this momentum a mid- and long-term pillar for China's economic growth. Given this, a proactive fiscal policy, if it were kept in force, would produce the effect of squeezing out private investment and would make the economy tend to become overheating due to the restraint of resources.

Thirdly, improvement in the efficiency of tax collection and management also constitutes one of the important reasons for the upswing of tax revenues, which proceed to provide conditions for reducing financial support.

At present, the tendency of the phasing out of the deficit economy is already crystal clear. In fact, the issuance of long-term treasury bonds is only a signal which demonstrates that the fading proactive fiscal policy is not only aimed at controlling the expansion of financial deficit, it is also a policy keynote based mainly on curbing inflation in coordination with current macro-control and regulation.

Under the circumstance of a sharp drop in the rate of deficit in 2004, the issuance of long-term construction treasury bonds will scale down. In the 2004 budget report, the size of long-range construction treasury bonds issued will be reduced from 140 billion yuan in 2003 to 110 billion. Yuan. This is a further reduction of long-term construction treasury bonds on the basis of a decrease of 10 billion yuan in 2003. In contrast, the importance of the monetary policy has soared in the process of macro-control.

The fading of the deficit economy actually reflects a profound shift of the focus of fiscal policy. This means the transit from the proactive fiscal policy on stimulating economic growth to a fiscal policy aimed at promoting balanced economic development and rectifying the imbalanced urban and rural economic development, the lagging agricultural development and uneven regional development.

In other words, if the original deficit economy placed the stress mainly on "construction-oriented finance", then the new fiscal policy pays more attention to public finance. Viewed from the use of the funds from treasury bonds alone, the funds are used in favor of rural areas, social undertakings, development of the western region, old industrial bases in northeast China, ecological improvement and environmental protection.

By People's Daily Online

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