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People's Daily Online>>China Business

Keeping the reins on easing vital for China’s economy

By Yang Guoying (Global Times)

08:30, April 19, 2012

When Premier Wen Jiabao stated earlier this month that the nation would soon begin fine-tuning its policies to promote the country's continued economic growth, many took this as a sign that the central bank would start loosening its tight monetary policy in favor of a more moderate stance.

In light of the country's current economic situation, China does need to moderately ease its monetary policies, especially if it plans to continue its support of infrastructure development and spur the country's slowing economic growth. However, I would also urge regulators to make sure that policy fine-tuning does not unleash a flood of government investment, which would harm China's economic development in the long run.

Such an unintended consequence is likely to take place as a huge sum of capital would be needed to finance the nation's uncompleted infrastructure and public works projects this year. It is estimated that government fixed asset investment will reach 4 trillion yuan ($634.63 billion) this year, a figure that includes subsidies for the construction of 17 million affordable housing units, and a 500 billion yuan investment in water management projects. The government shouldn't increase its fixed asset investment without careful deliberation and planning, since the funds it puts into construction and infrastructure development projects are already huge.

The problems caused by excessive investment have become severe over the past few years, and I fear that the country's economy could not bear another massive round of investment. From 2008 to 2011, China's fixed asset investment grew from 17.2 trillion yuan to 30 trillion yuan, an overall increase of 74.4 percent, exceeding even the 57 percent GDP growth rate recorded in the country during the same period. This huge wave of mounting investment drove up non-performing loan ratios at many of the country's banks and led to a surge in local government debts, which stood at 20 trillion yuan nationwide as of last year.

Taking the lessons of history into consideration, I think it would be a wiser move for the government to direct exiting capital into the real economy, rather than injecting even more money into the market. China's money supplies have already been expanding at a breakneck pace, growing from 47.52 trillion yuan in 2008 to 85.16 trillion yuan in 2010, a 79.2 percent increase.

I also suggest the government work to help investors allocate their capital more efficiently, by, for example, reforming initial public offering procedures to prevent companies from reaping easy money in the stock market. Also, the government should lower tax burdens for companies in the manufacturing sector to encourage private capitals to invest in this area.

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