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Why the NPC Approved 50 Billion Yuan Long-Term Government Bond
The 17th meeting of the Standing Committee of the Ninth National People's Congress recently approved another 50 billion yuan long-term government bond to be used to increase fixed asset investments last Friday. The bonds were primarily issued to sustain the momentum of China's economic growth.
In the first half of this year, China's GDP grew 8.2%, halting the downward trend in GDP growth for the past several years.
There are several major factors which contributed to the upturn in the economy, the main factor being the government's active fiscal policy. By this year, the Chinese government has already adopted an active fiscal policy for the third consecutive year. In 1998, it issued long-term government bonds worth 100 billion yuan. In 1999, it issued long-term government bonds worth 60 billion yuan. Early this year, it issued long-term government bonds worth 100 billion yuan.
The government investment on infrastructure projects worked to ward off the brunt of the Asian financial crisis and maintain momentum on China's economic growth. In turn, the economic growth has pushed consumer spending and exports up.
Whether China can maintain its economic growth hinges on the question whether its fixed asset investments can keep up the pace. In the first half of last year, investment increased by 15.1% but in the second half, investments fueled by government bonds weren't able to keep up. Thus, investments grew only 5.2% for the entire year.
Fixed asset investments increased 12.5% in the first half of this year as a result of the 100 billion yuan long-term government bonds issued early this year. But when the 100 billion yuan government bonds are used up, the lack of funding will become very apparent in the fourth quarter. Thus, an increase in issuing government bonds is necessary.
Another major reason why more bonds need to be issued is because of the strategy to develop the West. This year is the first year of the government's plan to develop the West. More funding is needed to invest in education, technology and environmental protection in the West.
Thus, the additional 50 billion yuan long-term government bond to be used for fixed asset investments is akin to throwing more firewood on a fire. By issuing the government bond, the foundation of China's economic growth will become more stable.
After it was announced that the 50 billion yuan government bond was approved, some people have worried that it would increase the risk.
The internationally recognized warning index for government bonds' liability rate is 60%. China's liability rate is 12.93%, based on 1999 statistics, far below the warning line.
Considering China's saving rate, for many years, China's savings rate has been very high. By the end of June, China's foreign exchange reserves reached US$156.8 billion and it has sufficient food reserves. This is more than enough to back up the 50 billion government bonds.
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