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Construction boom could hinder economic growth

By Zhu Daming (Global Times)

08:33, May 29, 2012

After a slew of economic data for April pointed a worsening downturn, China will soon move to speed up approvals for infrastructure construction and investment in an attempt to revive the country's slowing economy, according to recent statements made by Premier Wen Jiabao.

To many, stepping up construction of public works projects may seem like an effective means to stimulate growth. It has been argued that such a move would not only create more jobs and spark greater consumer spending, but also lead to increased activities in both the public service industry and the country's struggling manufacturing sector.

This push, however, would require a massive amount of capital at a time when government revenues are shrinking. More construction would call for the government to both inject more money into the market and raise taxes, which would be a drag on consumption, production and business growth. These consequences would inevitably run counter to the government's goal of accelerating China's economic growth engine.

In 2009, China rolled out a 4 trillion yuan ($631.19 billion) stimulus package, most of which was directed towards infrastructure construction, in order to minimize the effects of the global financial crisis.

Following this massive inflow of cash into the market, the consumer price index, a major gauge of inflation, rocketed up to a record high, gaining 5.4 percent year-on-year in 2011, according to figures from the National Bureau of Statistics. This severely curbed the buying power of the nation's residents as the prices of daily necessities, such as food, rose sharply.

Meanwhile, despite several efforts to lower tax burdens on individuals, over the past several years the government has steadily been pushing up taxes, which account for the lion's share of the government's overall revenue.

Ramping up infrastructure development would compel the government to collect more in taxes, which would hit the pockets of tax payers and depress both consumption and domestic demand.

At the same time, businesses and manufacturers in the private sector would likely also face heavier tax burdens in the scramble to fund infrastructure projects. In the current economy, a higher tax burden would devastate many of the country's small and medium-sized private companies, many of which are struggling to keep their doors open thanks to the current economic climate.


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