Zhao Xinjie

 

Last year the macro economy fared well, with its gross domestic product (GDP) growing to 18.2 trillion yuan (US$2.2 trillion), up 9.9 percent year-on-year.

 

However, there are three trends that policy-makers must pay close attention to: the strong rebound of the fixed-asset investment, the dropping industrial profits and rising bank saving rate.

 

To tackle those problems, policy-makers are expected to resort to a package of monetary, fiscal and industrial policies to accelerate economic restructuring. The macro economic regulation will no longer be simply "pro-active" or "stringent."

 

The monetary policy, based on the central bank's stance, is expected to remain stable while pre-emptive fine-tuning may be applied to maintain a balanced economy.

 

The central bank has emphasized its stance of continuing to push interest rate marketization to help commercial banks and rural credit cooperatives respond more actively to market risks.

 

However, since it may have a strong impact on the banks in the wake of the expanded operation of inter-bank bond transactions, policy-makers may not take significant initiatives this year. Of course, it is not impossible that the central bank will cut the base level of the interest rate of bank savings.

 

In the open market, the central bank may balance the role of bills and short-term bonds in withdrawing money from circulation. By far, the central bank has been withdrawing the money mainly through issuing bills.

 

As a result, the issuance of one-year bonds may be expanded, which will give the central bank more room for maneuvering in the open market.

 

Regarding credit, the central bank in 2004 had promised to implement a "stringent" policy to control medium- and long-term credit, according to its policy report in the latter half of that year.

 

Since 2005, it has shifted to a policy of "proper" and "rational" control over loan granting in the medium and long term.

 

Meanwhile, the central bank said it will further explore credit products and support "reasonable" housing consumption. This indicates that the central bank will continue to encourage the granting of medium- and long-term loans for housing consumption although it has been more cautious in warding off risks.

 

To facilitate the country's new blueprint of achieving a balanced development and building a new countryside, the central bank has also begun to give more support for agriculture, small- and medium-sized enterprises, employment and education.

 

The fiscal policy is expected to centre on stimulation of domestic demand this year.

 

In 1998, policy-makers carried out a pro-active fiscal policy and issued large amounts of treasury bonds to expand domestic demand and brave the Asian Financial Crisis. In 2004 and last year, as the economic situation changed, policy-makers have gradually reduced the issuance of treasury bonds and shifted their focus to economic restructuring to balance industrial and cross-regional development. Such a policy will continue this year, with the focus set on a stable and rational fiscal policy.

 

In the long term, final consumption is the ultimate driving force for economic development. To expand domestic demand, it is best to improve the income level of the public and reform the educational, medical and housing systems to strengthen people's consumption propensity.

 

This year, the basic economic growth pattern, which signifies the predominant role of investment and exports, will remain largely unchanged, but the role of consumption will be significantly enhanced.

 

Support for agriculture has been a focus of China's fiscal policy. This year, the policy will continue and the scale of subsidies for farmers in the main grain production areas will be increased. The fiscal policy will also see more input in rural infrastructure, medical care and the rural compulsory education.

 

In terms of taxation, there will be continual study of how to change the current production-oriented value-added tax into a consumption-oriented one.

 

Legislation that will unify corporate tax for foreign and domestic enterprises will be accelerated. And legislators will continue to discuss the levy of energy- and environment-related taxes to improve the efficiency of energy use.

 

This year, the industrial sectors will continue to suffer from the problem of overproduction.

 

Since the production capacities that were built in 2003 and 2004 will be released this year, overproduction will worsen this year.

 

To solve the problem, the government is expected to first resort to market-based solutions. Meanwhile, the government will lead the sectors to undergo restructuring to resolve their excessive production capacities.

 

Late last year, the State Council issued a decision on industrial restructuring. It suggested that the development of some industrial products be encouraged, some be restricted and some other products be gradually disallowed so that a balanced and environment-friendly economic growth could be achieved.

 

The author is a researcher with the Institute of Finance under the Industrial and Commercial Bank of China.

 

(China Daily February 7, 2006)