A recent State Council executive meeting has decided that China now should implement a proactive fiscal policy and a moderately loose monetary policy, and define further measures to boost domestic demand so as to maintain a steady and relatively rapid economic growth. It was also agreed at the meeting that in the past 2 months the worldwide economic and financial crisis has steadily worsened, and a flexible and prudent macroeconomic policy is needed to cope with the complexity of the situation and avoid adverse economic impact.
This is the first time in the past 10 years that the Chinese government has decided to implement a moderately loose monetary policy, and it represents a significant policy change. At the same time, fiscal policy is to be changed from "prudent" to "proactive."
Shenyin & Wanguo Securities macro-economic analyst Li Huiyong says the adjustment of both monetary and fiscal policies means the expansion of macro control. Maintaining steady and relatively rapid economic growth has definitely become the main target of domestic macro control over the next few years.
In 1995, to cope with the financial crisis in Asia, the Chinese government decided to implement a prudent monetary policy and a proactive fiscal policy. The move laid an important foundation for maintaining domestic economic growth and resisting the financial crisis. This policy combination continued till 2004.
At the end of 2004, the Central Economic Working Conference decided to implement "prudent fiscal and monetary policies" in order to control the excessive growth of fixed asset investment and adjust relationships between investment and consumption. The conference urged that a principle of dealing individually with different sectors should be followed when implementing macro policy measures. This policy combination continued till 2007.
At the end of 2007, the Central Economic Working Conference decided to implement "prudent fiscal policy and tight monetary policy" in order to prevent the rapidly-growing economy from overheating, and to keep structural price rises from turning into significant inflation.
However, monetary policy is no longer "tight" or "moderately tight" as the financial crisis spreads in the second half of 2008. According to public information, since September the People’s Bank of China (PBC) has cut rates 3 times in 2 months, reduced the reserve ratio twice, and reduced public market operations. The central bank no longer lays rigid constraints on bank credit and loans.
China International Capital Corporation (CICC) chief economist Ha Jiming says the effect of the "moderately loose monetary policy" may be more powerful than the "prudent monetary policy" of 1998. The policy combination will definitely boost market confidence.
A prudent move by the Chinese government
The State Council executive meeting approved 10 measures to boost domestic demand and promote economic growth. The meeting said projects provided for within the 10 measures involve 4000 billion yuan of investment up to the end of 2010. To accelerate the progress of construction, the meeting also decided that 100 billion yuan of central investment will be added in the fourth quarter of this year, and 20 billion yuan investment will be earmarked for reconstruction in quake-hit areas next year.
Judging from the announced policy measures, the economic steps taken by the Chinese government are much bigger than those taken 10 years ago to deal with the Asian financial crisis, says Peng Xingyun, a researcher at the Institute of Finance and Banking under the Chinese Academy of Social Sciences (CASS). In dealing with the Asian financial crisis China increased its issue of treasury bonds but did not specify the volume of investment. This time the situation is different – the government has defined target sectors for investment, and also the volume of funds to be invested.