China returns to prudent fiscal policy after seven-year expansion

China has begun to shift to a prudent financial policy for economic development after having adopted a proactive fiscal policy for securing sustainable growth during the past seven years.

The current proactive fiscal policy has already seen changes this year and China will formally implement the prudent policy next year, according to Vice Finance Minister Lou Jiwei.

In line with the prudent policy, the Chinese government will cut budget deficit and public investment, reform expenditure structure and push financial reform while carrying out macro-control measures, he said.

China embarked on a proactive fiscal policy in 1998 after the 1997 Asian financial crisis. Since then, the Chinese government has successfully shaken off the threat of deflation and witnessed rapid economic growth.

Although the Chinese government started to implement macro-control measures from early this year to cool down some overheated sectors of its economy, which recorded a 9.1 percent growth rate last year, it is still troubled with problems, including redundant investment, over-reliance on government spending to boost growth and the backward development in rural areas.

Long-term construction treasury bonds, a major means to boost investment in the proactive fiscal policy, has amounted to 910 billion yuan (109.6 billion US dollars). But the contribution made by the investment using state bonds to GDP growth fell from 2 percentage points in 2002 to 1.8 percentage points in 2003.

Moreover, over-reliance on state bonds to prop up growth has led enterprises to compete for government approval for capital instead of building up a market-oriented investment mechanism.

Experts predicted that the financial authorities were likely to cut long-term treasury bonds by a large margin, while slightly reducing budget deficit next year to ensure sustainable growth.

Mu Fang, a research fellow with China's Central University of Finance and Economics, even gave out a timetable. He said that the government could call off the issuance of long-term construction treasury bonds about 2007.

However, while pushing investment demands, the proactive fiscal policy has failed to effectively expand consumer demands.

The retail sales of consumer goods in 2003 and the first six months of this year rose by 9.1 percent and 12.8 percent. Each figure is 17.6 percent and 15.8 percent lower than the growth rates of fixed assets investment during the same period.

The Chinese government has also started to take a more cautious look at its budget deficit. Despite calculations that estimated China's Q1-Q3 fiscal revenue would increase by 420 billion yuan (50.6 billion dollars) or three times the government's expectation, Lou Jiwei said "our fiscal policy in line with this year's macro-control measures doesn't allow to spend additional revenue."

The increased revenue of 100 billion yuan (12 billion dollars) among the 420 billion yuan collected by the central financial authorities will not be used to reduce the budget deficit of 319.8 billion yuan (38.5 billion dollars). Instead, it will give more financial support to increase farmers' incomes, build a social security net as well as education and health services.

The financial authorities will work harder on rural tax reduction and exemption to eliminate rural taxes ahead of the original five-year schedule, Lou said.

The proportion of social security expenditure in total fiscal expenditure will, said Labor and Social Security Minister Zheng Silin, be increased from the current 10 percent to 15 to 20 percent.

Meanwhile, education expenditure grew by 21.3 billion yuan in the year's first half and more is expected to be spent next year.

"In fact, even under the banner of proactive fiscal policy, certain changes have been made to reduce the trend of expansion," said Gao Peiyong, research fellow with the Chinese Academy of Social Sciences.