Editorial: China Policymakers Need to Push Harder as Economy Gains Traction
China’s economy showed better-than-expected signs of revival in the first quarter, with gross domestic product (GDP) expanding by 6.9% from a year earlier, data released on April 17 showed. Then last April 19, China’s cabinet, the State Council, announced a slew of tax cuts for businesses to ensure the economy retains its momentum.
The changes include simplifying the value-added tax system, giving more tax breaks for small and midsize enterprises, and providing tax incentives to boost investments in technology and R&D ventures. These measures are expected to reduce the tax burden on businesses by over 380 billion yuan ($55.5 billion) each year, encourage spending and boost growth.
Other policies published earlier this year will trim nontax government charges, including business registration fees or quarantine of cross-border goods by 200 billion yuan a year.
Growth picked up in the last quarter of 2016, and the economy has sustained this momentum, supported by a revival in manufacturing and an increase in domestic consumption. Government measures to slash overcapacity, unsold inventory and reduce excess financial leverage and rein in business costs all seem to work. Since September, there has been an upward trend in China's producer price index (PPI), which measures the average change in prices by producers each month for domestically made goods, services, and construction. It bounced back in September after a 54-month decline, a sign of improving business profitability. Meanwhile, government attempts to promote public-private partnerships has fueled investment in infrastructure and money flowed into sizzling property markets in major cities.
Despite all these positive signs, the foundation of China’s economic recovery is still shaky. And if growth in the world economy shifts to a slower gear, it could create further uncertainties for China. Therefore, authorities must continue to pay close attention to China’s growth prospects and adjust their policies to steer clear of economic headwinds.
The best way to consolidate the gains made so far is to use this period of steady growth to implement deeper reforms.
At this moment, policymakers should switch their focus from exploiting monetary-policy tools to fiscal-policy measures. Monetary policy is a good tool to cool an overheated economy, but it is less effective when it comes to reducing China’s reliance on exports and boosting domestic consumption and services, which will help adjust the structure of an economy. Since the 2008 global financial crisis, governments, including China’s, have relied mostly on monetary-policy tools to stimulate growth, but their effectiveness has diminished over time. China has gradually adopted a prudent and neutral monetary policy stance while relying more on proactive fiscal-policy alterations. This is because there is more room to maneuver fiscal policy given China’s current debt and deficit level, and also because fiscal measures can promote structural reforms more effectively.
Pushing ahead with reforms is the fundamental solution to ensure that China’s economic revival continues. And policymakers should focus on the following aspects:
First, shake up sleepy state-owned behemoths. In the first two months of this year, state-owned enterprises (SOEs) saw their profits double from the same period last year, creating an opportunity for change. This includes stepping up efforts to cut overcapacity, allowing more private players into markets dominated by state actors, improving corporate governance, and promoting mixed ownership, which refers to inviting private capital to invest in SOEs. Any hesitation on these fronts could lead to a wasted opportunity.
Next, further liberalize the services sector. Opening up lucrative sectors such as telecommunications, transportation, education, health care and financial services to private capital is at the core of structural changes. It will create jobs and reduce the economy’s reliance on manufacturing.
The third priority is to accelerate urbanization and reform the land policies. Individuals should be allowed to move freely between rural and urban areas — not only rural dwellers who want to move into cities, but also urban residents who want to buy land in the countryside. Authorities should allow rural-land sales to facilitate such movements and improve farmers’ income. It is a crucial change that will help narrow the poverty gap.
Then there is the question of further tax reforms. In addition to reducing the tax burden on businesses, it is vital to establish a proper system to distribute tax revenue between the central and local governments. As the country shifts from business taxes to value-added taxes, some local governments have seen holes in their budgets as income from tax collection declines. It is important to help local governments set up regional tax systems and allow certain provincial governments to borrow more to invest in future growth. But a strict supervision system must be put in place to monitor local governments’ borrowing activities and prevent a debt crisis. For years, the Ministry of Finance has warned local governments about looming debt risks but has failed to take concrete steps to slow down the borrowing binge. Institutional reforms are needed to give regulators legal teeth.
Finally, China should further open up to the outside world, leveraging its One Belt, One Road initiative. The upcoming Beijing summit in mid-May for leaders of countries participating in the initiative will be a landmark event as China further embraces the outside world.
Excuses and foot-dragging, which has always existed irrespective of whether the economy is in good shape or performing badly, has made it difficult to make the best of the current window of opportunity for reform. Regardless of how long this rebound lasts, the above reform tasks should be on China’s must-do list. If we allow this chance to slip away, the room for policy maneuvering will only narrow further, and the economy will suffer. The upbeat economic performance in the first quarter provides the best opportunity for policymakers to step up efforts to carry out the long-awaited reforms.
Hu Shuli is the chief editor of Caixin Media.
Founder & Publisher, Caixin Media
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