OPINION> Commentary
Govt doses needed to best revive economy
By Sun Lijian (China Daily)
Updated: 2009-03-13 07:46

The consumer price index (CPI) and the producer price index (PPI) both fell in February, raising concern all round that the economy could enter into a worrisome deflation.

The National Bureau of Statistics has said that the 1.6 percent year-on-year drop in the CPI in February was the first in six years. For the record, the PPI dropped 4.5 percent year-on-year last month.

But the drops in the CPI and PPI should not shroud our optimistic look about the economy because it is already showing obvious signs of recovery owing to the government's proactive fiscal and moderately loose monetary policies and its plans to revive 10 major industries. Besides, the continuous growth in banking loans and encouraging major indices emerging from the manufacturing sector, which has suffered a setback, indicate market fluidity is good in the country. This is important because the global financial crisis has created a fluidity panic in a lot of countries.

Plus, the government's large-scale industrial revival campaign and its concerted efforts to improve people's livelihood will help the country pull out of an economic slowdown.

That does not mean we should be overly optimistic about economic development either. The shrinking markets and falling demand in the US and European countries could thwart China's efforts to maintain a steady growth of its export-fed economy. If the domestic market deteriorates because of the deepening global crisis, it could sap the confidence of some people, adding to their fears over deflation and prompting them to save rather than spend more. Moreover, dwindling domestic demand would certainly throw China's economic recovery plan into jeopardy.

While great efforts are being made to check the economic downturn, we should pay special attention to ease people's fears over deflation. To achieve that, we have to send positive and timely signals to consumers, making it clear that the economy is on the way to recovery. Simultaneously, the government should intervene in the market and create a pricing mechanism to revive it and then help the economy regain its badly needed vitality.

The fluidity panic is spreading across the world as the global financial crisis unfolds. This has made enterprises, financial bodies and individuals in the US and European countries reluctant to pump more funds into the market. Worse, some countries have even taken steps to squeeze the already meager market fluidity. The result: some emerging markets are moving toward greater financial chaos.

This makes it all the more important for the Chinese government to pump in as much funds as possible into its fluidity hungry market to help it perform its normal functions and stimulate investment and consumption. The funds would also help the market gradually resume its normal pricing mechanism, which has been hurt by the global financial crisis.

Such steps would ensure that more than only the financial tools work. Announcements like the 850-billion-yuan ($124.27 billion) financial deficit this year and the government's remitting efforts to improve enterprises' financing systems and to build an all-inclusive healthcare system and State-funded housing will also play a positive role in boosting the economy.

There is no doubt that the strong doses prescribed by the government and its huge financial input plan could increase the risk of inflation in the future. But if concerted efforts are made to clear the obstacles on the road to raising domestic demand and lowering the operational cost of the country's social security system, the problem of surplus production plaguing the economy could be solved. A decreasing deflationary pressure will help the country accelerate the pace of much-needed indigenous innovation in order to raise its industrial value-added capability.

We should not slow our efforts to rescue the market because of the fear over giving rise to possible inflation. We expect the government to allocate its huge budget funds to the most appropriate areas and digest the pressure of a massive production surplus caused by the shrinking US and European markets. Timely and workable steps taken by China will certainly bring down the costs for the country to keep inflation to the lowest level. And as things stand now, it seems China is likely to pull out of the economic slump earlier than other economies.

The author is professor of economics in Fudan University in Shanghai.

(China Daily 03/13/2009 page9)