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Monetary, fiscal policy co-ordination urged
( 2003-11-03 09:28) (China Daily)

China should improve co-ordination of its fiscal and monetary policies in order to maintain rapid and healthy economic development over the next few years, experts said.

Although fiscal and monetary policy are independent of each other, their ultimate goals are identical - to serve the economy, said Wang Zhao, a researcher with the State Council's Development Research Centre.

The nation's economy, which saw 8.5 per cent year-on-year growth during the first nine months of this year, has been facing the danger of overheating, Wang said.

In order to prevent this dangerous prospect from occurring, the central bank issued a rule in June, saying it would tighten controls on loans to the fast-growing real estate sector.

In a further move, the People's Bank of China announced a 1 percentage point hike in the required reserve ratio at commercial banks in August to 7 per cent, which is thought to have frozen 150 billion yuan (US$18 billion) in funds.

However, these actions seemed to have little impact on money supply and the rapid increase of loans, Wang said.

Figures from the central bank suggest that, by the end of September, the broad measure of money supply, the M2, stood at 21.4 trillion yuan (US$2.6 trillion), up 20.7 per cent from a year earlier.

Aggregate outstanding renminbi loans rose by 2.5 trillion yuan (US$301 billion) during the January-September period, which were 624 billion yuan (US$75 billion) more than the total loan increases for all of 2002.

Furthermore, adjustment of the reserve ratio has led to a rise in the money market interest rate, which forced the Ministry of Finance to cancel the issuing of treasury bonds in September.

Under the circumstances that market forces are still active, it was improper for the government to tighten money supply, said Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences.

"A wiser choice was to phase out the proactive fiscal policy," Yuan said.

The pro-active fiscal policy was introduced in 1998 to minimize the negative impact of the Asian financial crisis.

The policy was characterized by increasing government expenditure, mainly in infrastructure projects.

The central government has so far issued a total of 660 billion yuan (US$79.5 billion) worth of long-term treasury bonds and plans to issue another 140 billion yuan (US$16.9 billion) this year.

The pro-active fiscal policy has played an important role in fuelling the country's economic development during the past five years, said Niu Li, a senior economist with the State Information Centre.

But as the country's economy begins to heat up, the active role of government investment has begun to reduce, he said.

The weakness of government investment featuring low efficiency begins to loom, he said.

The proactive fiscal policy also failed to pay enough attention to some social issues such as public health, social security and environmental protection, Yuan said.

"State finances should pay more attention to solving problems which cannot be solved by the market, including public health, social security and environmental protection, while government expenditure directed at expanding demand should be reduced," he said.

There was no need to worry that the phase out of the policy would have negative impact on economy, because market forces have begun to impact greatly on economic development, Yuan said.

During the past five years, the ratio of State investment through issuing treasury bonds to the entire fixed assets investment dropped, but the growth of the entire fixed assets investment grew steadily.

"Fiscal policy should help create a good environment for companies, especially private companies, so that market factors can play a more important role," Yuan said.

The government should try to regularize the market and improve the tax environment, he said.

New tax reform schemes such as unifying income tax for domestic and foreign-funded companies and basing value-added tax levies on consumption rather than on production should be carried out when the time is right, he said.

Zhang Peisen, a senior researcher with the Taxation Research Institute under the State Administration of Taxation, said the country could not implement the policy in the long-term.

Massive government debts, that could possibly be incurred by a proactive fiscal policy, will impede the country's future economic development, he said.

China is still suffering weak domestic demand despite implementing the policy for about five years.

The failure to lift domestic demand arises from the country's economic structure, which cannot be resolved by fiscal policy alone, he said.

The ultimate solution to the problem of sluggish domestic demand rests with comprehensive economic reforms, he said.

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