China to maintain proactive fiscal, prudent monetary policies

Updated: 2014-03-05 10:29

BEIJING - China will continue to implement a proactive fiscal policy and a prudent monetary policy, Premier Li Keqiang said Wednesday at the opening of the annual session of the National People's Congress (NPC), China's top legislature.

"We will improve the macro-control policy framework, maintain a lower limit to ensure stable growth and employment and an upper limit to keep a cap on inflation, and continue to implement a proactive fiscal policy and a prudent monetary policy," he said, when delivering a government work report to the lawmakers.

The government budget deficit for this year is projected to be 1.35 trillion yuan (220 billion U.S. dollars), an increase of 150 billion yuan over last year, which consists of 950 billion yuan of central government deficit and 400 billion yuan of bonds to be issued on behalf of the local governments, Li said.

The deficit rate, namely the ratio of deficit over GDP, will be kept at 2.1 percent, fractionally higher than the 2-percent target for last year.

"The current economy still faces downward pressures, with enterprises mired in difficulties. The country needs a proactive fiscal policy to give an extra push," said Zhu Baoliang, an analyst with the State Information Center, a government think tank.

While pressing ahead with tax cuts and increasing public spending, the country keeps the deficit rate almost flat so as to guard against risks, Zhu explained.

Other analysts noticed a change in the budget deficit to address the widely-watched local government financing difficulties.

"The central government approves a higher quota for local government bond issuances which are fully guaranteed by the central government," Bank of America Merrill Lynch economists Ting Lu, Xiaojia Zhi and Sylvia Sheng said in a research note.

In addition to these bond issuances, which increased 50 billion yuan from last year, it is likely for local governments to borrow from other regulated channels as the Premier promised to develop a standard local government borrowing mechanism, the Merrill Lynch economists said.

To implement a prudent monetary policy, China's broad money supply (M2) is forecast to grow by around 13 percent, the same as last year's projection. In 2013, M2 grew 13.6 percent year on year, slightly overshooting the forecast but "well within the target range," Li said.

"We will pursue a balanced monetary policy, move toward a basic balance between overall supply and demand in society, and foster a stable monetary and financial environment," the premier said.

The government pledged to strengthen macro-prudential management to encourage an appropriate increase of monetary credit and nongovernmental financing.

Li also added the government will maintain policy options and make adjustments "at an appropriate time and to an appropriate degree."

Yang Ziqiang, an NPC deputy and head of the local branch of People's Bank of China in Jinan, Shandong Province, said the monetary policy at this stage should ensure the moderate growth of credit and social financing.

"The monetary policy should better support the development of the real economy and avoid risks," Yang said.

A proactive fiscal policy denotes a moderately expansionary policy that creates demand and stimulates the economy primarily by expanding domestic demand, while the ultimate goal of a prudent monetary policy is to maintain price stability.

China set its 2014 growth and inflation targets at 7.5 percent and 3.5 percent, respectively, both unchanged from last year's targets and in line with market expectations.