Developing National Economy Requires Sound Financial System

China must further its financial reform by establishing a stable, standardized, efficient and healthy financial system and operation mechanism to ensure the lasting, rapid and sound development of the national economy, said an article in the Outlook Weekly.

During the next decade, China will face severe financial problems and challenges, the article said.

Currently, the central government is adopting a proactive budgetary policy, issuing State treasury bonds and expanding public expenditures to stimulate domestic demand, and hopefully, to invigorate the entire national economy.

However, the central government's financial income still accounts for a decreasing percentage of national revenue, although the proportion of the State revenue in the gross domestic product (GDP) has increased.

As a result, the budgetary deficit has abruptly risen.

We should not be so nervous when talking about deficits. Under the market economic system, the State plays an important role in adjusting the primary distribution of social wealth. Therefore, financial deficit and government debt are common phenomena in the economic life.

According to statistics, China's central budgetary deficit in 1999 accounts for around 2.2 per cent of the GDP. There is still a manoeuvre space of 0.8 percent to the internationally recognized safety line of 3 percent.

The government should, according to the economic situation, adjust the scale of budgetary deficits and government debts rather than eliminate them.

Another concern is that, at present, the proportion of the State revenue in the GDP, which is 12.4 percent in 1998, is still quite low.

Yet, it is estimated that, to maintain the proper operation of the government, the government expenditure has already accounted for approximately 25 percent of the GDP, primarily depending on the government's non-budgetary income.

Therefore, the economy is already heavily burdened, leaving limited space to increase capital that can be appropriated by the central government.

It is predicted that during China's 10th Five-Year Plan period (2001-2005), the increase in the State's financial income will primarily be achieved through taxation augmentation accompanying the economic growth.

However, a coordinating mechanism between tax revenue increase and economic growth has not been established.

Moreover, since the mid-1990s, China's economy has entered a stage of structural readjustment. The economic growth has slowed down, and enterprises' profits are also sliding. This has considerably bottlenecked the State revenue.

The vulnerable financial situation is being further aggravated by local governments' potential deficits and State banks' bad loans.

In addition to the mounting social welfare expenditures on laid-off workers, China will face severe financial pressure during the next decade.

In the coming years, financial regulation will continue to play a significant role in China's economic development.

To what extent China needs to continue the current expanding monetary policy depends on the next few years' economic situation, which is influenced by both the international environment and the result of the current stimulative measures on the domestic demand.

Given the current economic situation, the expanding monetary policy will continue for some time to maintain an acceptable GDP growth rate.

During the 10th Five-Year Plan period, according to some calculation, China is expected to issue 410 billion yuan (US$49.4 billion), 380 billion yuan (US$45.8 billion), 380 billion yuan, 350 billion yuan and 350 billion yuan (US$42.2 billion) in State treasury bonds respectively, to satisfy the capital needs of the expanded government expenditures.

This index is still with the international recognized safety line. China still has the capacity to regulate the economy through issuing treasury bonds.

However, this is no reason for relief.

To prevent more bad loans, China must attach importance to the utilization of capital, strengthening its supervision and enhancing its efficiency. The financial pressure China now faces compels the acceleration of the financial reform.

To cope with the financial pressures during the next decade, China should consider the following when enacting its financial policies:

The financial policy should target the current sluggish demand, making anti-cyclical depression efforts together with the functioning of currency policies.

The expanding public expenditures should focus on agricultural infrastructure facilities, environmental protection and pollution treatment, building civil households and rural and urban infrastructure construction.

With the change of the governmental functions, public expenditures should be pulled from those production and construction industries and instead focus on public projects and services which can satisfy the demand of the people.

The financial management should be improved to meet international standards.
China must adopt an appropriate tight monetary policy, putting the scale of budgetary deficit and State debt under strict control.

The invigoration of social consumption, instead of simply the government investment, should become the propelling force behind the economic growth, the article said.

To achieve this, more work should be done including providing consumption loans, supporting high-risk enterprises and giving preferential policies to certain industries to achieve more stimulative results with a smaller amount of capital.



(China Daily 02/29/2000)



 
   
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