Premier Zhu’s visit and China Economy

Author’s note: This article was written in 1/99. Premier Zhu will soon retire and leave the political scene. The China economy for the past few years was in the right track. Amidst the global economic slow down, China growth is still spectacularly leading the rest of the world. Of course, many countries when come to public expenditure make unwise value destroying spending. They don’t creatively planning what to spend and how to spend? That is why criticism comes in. China still relies public expenditure to stimulate its economy. This is not a long-term solution. Long term should move towards balanced budget. (12/2002)

I was touched by China Premier Mr Zhu Rongji’s speech in the Q and A session of the "17th Singapore Lecture".

I wish to share some of my view on China’s economic development based on the observation of my visit to China about a month ago.

The greatest controversy is surrounding whether China should resort to fiscal stimulating and devoid of monetarism. Eventhough China has been implementing fiscal policy for several years. There are economists still advocate monetary policy is the only panacea. To reflate the economy, printing money is the only way to get out of the deflationary spiral.

For China case, increase in money supply or lower interest rate certainly will have impact on consumption due to easy money. I did propose reduction of interest rate as a measure in my April’s mail to this forum. However, China has cut its interest rate seven times and has little impact insofar. It seems monetarism does not work in China at least till now.

I come up with the following possible scenarios to explain this phenomenon.

One, Monetary policy take longer time to effect.
Two, China is in the process of transforming its economy from socialism to capitalism. There are many systems still not in place. Therefore, the flow of money is clogging in the channel.
Three, the extension of two, is through my observation in China. The credit utilisation in China is low. Therefore, the benefit of low cost of money is not exploited by ordinary consumer but SOE. Coupled with underutilisation of the marketing 4 Ps, put limitation to the success of the policy.
Fourth, monetary policy is not effective for the cure. Interestingly, Japan has the similar problem, and its cost of capital close to zero. Its monetary policy implemented for years and yielded no prominent results.

Is fiscal stimulus the answer for China economy? My view is China has more legitimate reason than Japan in adopting fiscal spending policy. Relatively, China is a developing country whereas Japan is a developed one. They face different perspectives to pump prime. They should adopt a common choice, which strategically add value to the future economy. Therefore they should evaluate and sift from many projects available and choose ones that fulfil this goal.

Neither do I favor fiscal nor monetary policy. Fiscal policy is a temporary measure strategically to buy time for economic reform to ensure that economic momentum is maintained. That is how Japan jumpstarted its economy and China can maintain its GDP growth rate. Fiscal and monetary do have their strength respectively to cushion economic activities. How far the mass public spending can go on depend on the particular country’s debt capacity. China may also consider tap international funds if it can reduce the counter party sovereignty risk and adopt a shorter project life period and gestation period from fund requirements to fund generation same as the West. It will attract more foreign investors to joint venture in China’s public projects and thereby save more money for other uses.

Unemployment, we used to view it as a threat to social stability, and it is unproductive and impropitious to a nation. Putting money to the unemployed pocket itself is unproductive and should be a temporary measure. China should also see this as an opportunity to formulate its human resources plan and redeploy its human resources. In view of the high development of its future economic developments if it get out of its current economic woe, it certainly requires different grades of workers, executives in different industries at different levels. It should take this opportunity to reform its current structure to train its human resources to fulfil its current and future demand.

As the economic reform goes deeper, or China opens its door further to foreigners and resulting more enterprises go bust due to severe competition and more people are out of the street. Unemployed becomes a common phenomenon. To institute a structure to fine-tune and unleash its current Human Resource supplies becomes all the more important. With this structure, prima facie, China can withstand any setback from the economic reform in the future. It is a price inevitable for economic reform. It gives the social security the country people want and they are more at ease with the change because their rice bowls are temporary broken and they are looking forward for new job opportunities. They know there is a social network that is ready to protect them. They are more confident and willing to spend the current savings for consumption. As everything is in its place, the economy will be back on track.

It can also open up more avenues, such as providing fiscal incentives and aids for the unemployed to migrate to the less developed provinces to fuel growth in those areas and ease the tension in the developed region. It also opens marketing channel to absorb the oversupplies. This is the theory of dissemination that particularly suitable for China. This was what I meant by plenty of leeway for improving lifestyle in China in the April’s mail this year.

I sincerely hope that with the lead of premier Zhu, China will soon out of the scourge of economic woe as those of the Asian economic crisis stricken countries.