Signs of cooling off in the growth pace of the world's most rapidly growing economy in the first half of the year have stoked scepticism among some economists that a proactive fiscal policy, kicked off in 1998 to offset risks of an economic meltdown, has run its course.

But others believe it is still premature to call off the expansive fiscal policy which features increased national debt issuance to finance infrastructure projects, saying the growth is still some distance away from being self-sustaining.

"It's not yet the right time," said Dong Furen, senior economist and deputy director of Economic Committee under the Chinese People's Political Consultative Conference. "(The phaseout of the proactive fiscal policy) depends on if the economy has developed the ability for self-sustaining growth."

He said the government is still the main player in financing increases in fixed investment, while private investment, although on the rise, has yet to gather momentum.

China took to massive public spending schemes financed by huge Treasury debt issuance in 1998 to kick-start the lacklustre domestic demand, a term Chinese economists use to refer to mainly fixed investment and private spending.

Ni Hongri, a researcher with the Development Research Centre under the State Council, China's cabinet, agreed that China should hold on to its current fiscal policy, cautioning that stopping it abruptly may result in an economic backslide.

"The pull effect of the (proactive fiscal) policy on the economy is still relatively big," she said. "So phasing it out now may possibly cause a recession."

The Chinese Government borrowed a staggering 1.12 trillion yuan (US$135 billion) through Treasury bonds issuance in the three years ending 2000 to finance massive infrastructure projects as well as technical upgrade programmes.

As a result, fixed investment financed by national debt as well as supplementary funds raised by local governments now account for as much as one-third of the total fixed investment in some provinces, particularly in the central and western areas, making it difficult to wean the economy immediately from fiscal support, Ni said.

Finance Minister Xiang Huaicheng said earlier this year that a total of 600 billion yuan (US$72 billion) is needed before the end of 2002 to complete ongoing infrastructure projects.

However, the economists agreed that it would be risky to let the heavier-debt approach, which was meant to be a short-term measure at birth, drag into a long-haul policy.

"If we are not getting closer to (immediate) financial risk, it's undoubtedly accumulating," Ni said.

The liabilities owed by local governments would make the real level of China's indebtedness much higher than the official central-government-only outstanding debt to gross domestic product (GDP) ratio of 14.6 per cent at the end of 2000, which is well in the safe range by international standards, Ni said.

"If (the debt at local governments) is calculated, the size of the outstanding amount is not necessarily smaller than that with the central government," she said.

Rather than calling off the expansive policy outright, Ni noted it is more appropriate to shift its role to fostering self-sustaining capabilities of the economy and invigorating businesses while preparations are made for a final retreat.

"While the target in 1998 was to offset adverse impacts of the Asian financial crisis and prevent economic recession, we should now make a major aim of fostering vitality inside the bodies of enterprises and the economy," she said.

China's policymakers must leave some room for further policy manoeuvring to steer clear of the similar over-reliance on fiscal stimulus that has mired the economy of its neighbour Japan for years, the researcher said.

China's fixed investment in the first half of the year totalled 1.2 trillion yuan (US$145 billion), a rise of 15.1 per cent on a year-on-year basis, while the corresponding growth rate of private investment slowed by 2.1 percentage points from a year ago to 6.5 per cent annually.

Total private investment stood at a meagre 159 billion yuan (US$19 billion) at the end of June.

The sluggish private investment, coupled with lacklustre private spending hampered by slow growth of farmers' incomes as well as a prolonged global economic slowdown, has dampened the prospects for withdrawing increased dosages of national debt, Ni said.

Ni also called for easing market access restrictions and the removal of disparity treatments to stimulate private investment.

(China Daily 08/06/2001)