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Chinas Fiscal Policies during the Post-Crisis Era


									        China’s Fiscal Policies during the Post-Crisis Era
                               JIA Kang, LIU Wei
                       (Research Institute for Fiscal Science,
                          Ministry of Finance, P.R. China)

     This paper summarizes Chinese fiscal policies against the global financial crisis and
     then analyzes the mechanism, timing and keys of its exit strategy. We believe China
     cannot exit from proactive fiscal policies at least until 2010. The targets, principles,
     coordination, challenges and countermeasures of Chinese fiscal policies are also
     discussed in an in-depth way.

Ⅰ. Introduction
Two years ago, the unexpected global financial crisis played havoc on the world
economy and posed severe challenges on the macro-economic control for every
country. In dealing with this disaster, fiscal policies are regarded as an important
measure. In November 2008, China announced to shift its macro-economic policies
into moderately relaxed monetary policies and proactive (or expansionary) fiscal
policies, which turned out to be very effective. Chinese economic performance
gradually recovered from fairly low growth in the first half of 2009 to relatively high
growth in the second half. The annual GDP growth registered 8.7%, with its quarterly
growth in the 4th quarter as high as 10.7%. It is universally expected that China will
achieve even greater growth in 2010 and make progress in its economic restructuring.
Now that such term as “post-crisis era” is popularly used to indicate the new stage that
the world is in, it is imperative to review Chinese fiscal policies against crisis and
explore their targets during the post-crisis era as well as other important issues.
Ⅱ.China’s Fiscal Policies against the Global Financial Crisis
The global financial crisis, intrigued by U.S. sub-prime mortgage crisis in 2007, soon
spread from developed countries to developing countries, and from the financial
sector to real economy. Against the backdrop of deepening economic globalization
and strengthened inter-dependency among countries, no country can survive this
financial crisis by their own. Under such circumstance, Chinese government made
resolute decisions after carefully analyzing the current situation and decided to
transform its macro-economic policies. In November 2008, it launched moderately
relaxed monetary policies and proactive fiscal policies, and put into force many
measures to expand domestic demand and secure economic growth. An economic
stimulus package was initiated to allocate 4 trillion RMB for investment and promote
fast and stable economic growth. This round of proactive fiscal policies, featuring
Chinese characteristics, succeeds in coping with both the external impact from the
global financial crisis as well as the internal major contradictions and difficulties. To
sum up, the principal content of these policies is to boost the domestic demand,
sustain the economic growth, promote the employment and maintain social stability.
Their major features are economic restructuring, nurturing innovation and deepening
reforms, with its foundation as strengthening social security and promoting social
welfare (see Table 1). While ushered into 2010, we can see that these policies

gradually produce desirable effects and play an important role for the steady recovery
of Chinese economy.

    Table 1: Priorities of China’s Economic Stimulus Package and
                             Relevant Data
              Increase the government investment by a large margin, which in total will reach the
              sum of 4 trillion yuan within two years. Among this huge investment plan, 1.18
              trillion RMB is from the central government and structural tax reduction is
              implemented to stimulate domestic demand.
   Four       Implement the plan to adjust and reinvigorate ten key industries, aiming to enhance
  Focuses     the overall competitiveness of the national economy.
              Forge ahead independent scientific and technological innovation to support a
              sustainable development.
              Substantially enhance the level of social security and encourage rural and urban
              employment to facilitate social development
              Improve the macro-economic management and stick to the guideline of flexible but
              prudent control measures. Implement proactive fiscal policies and moderately
              relaxed monetary policies.
              Actively boost the domestic demand, particularly consumption demand. Put more
              emphasis on the role of domestic demand in stimulating the economic growth.
              Strengthen the fundamental role of agriculture. Promote the stable agricultural
  Seven       development and consist increase of farmers’ income.
Components    Speed up the transformation of growth pattern through forceful strategic adjustment
              of the economic structure.
              Keep on advancing reform and opening-up to build a mechanism for sustainable
              and scientific development.
              Make an energetic effort to promoting social development and improving people’s
              living standard.
              Improve government governance to scale up the social management capacity.
 Fourteen     8%: GDP grows at around 8%
              9 million: Create over 9 million new jobs in urban area.
  targets     4.6%:Control the registered unemployment rate within 4.6%

              4%: Control the CPI growth rate at around 4%
              950 billion:The national fiscal deficit registers 950 billion yuan, including 200
              billion of local bonds.
              5 trillion:Issue over 5 trillion yuan of new loans

              550 billion:550 billion of tax-reduction for companies and individuals

             908 billion:The central government invests a total of 908 billion yuan
             42 billion:The central government is about to put into 42 billion yuan to promote
             331.8 billion: government at different levels will channel additional 850 billion
             yuan into the health care reform during the next three years, including 331.8 billion
             from the central government
             716.1 billion:The central government will invest 716.1 billion yuan for rural
             development, with a year-on-year increase of 120.6 billion.
             146.1 billion:The central government invests 146.1 billion yuan for science and
             technology, up by 25.6%
             293 billion:The central government plans to allocate 293 billion yuan to social
             security, up by 43.9 billion over the last year
             130 billion:Another 130 billion yuan will be put aside for post-earthquake

1. Major content and measures in proactive fiscal policies
(1)The primary concern of this round of proactive fiscal policies is to boost the
domestic demand, sustain the economic growth, promote the employment and
maintain social stability. The specific measures are as follow:
A. Increase public investments
Given the sharp decline of foreign demand due to the financial crisis, it is a must for
China to substantially expand the domestic demand, so increasing public investments
is regarded as the most preferred policy in this regard. Ever since the 4th quarter of
2008 when Chinese government started to implement proactive fiscal policies, CCP
and the State Council launched a 4-trillion- yuan investment plan to boost the
domestic demand. To be specific, the central government devoted 1.18 trillion yuan
for this plan (104 billion in the 4th quarter of 2008, 487.5 billion for 2009 and 588.5
billion for 2010). The rest of investment came from local governments and bank loans
(this 4-trillion investment plan structurally consists of 7 components. See Chart 1). In
2009, the central government allocated 908 billion yuan for public investments in its
budget, up by 487.5 billion, to affordable housing projects, rural projects on water,
electricity, road, gas, housing, major infrastructure construction projects, social
projects of health care and education, energy conservation and emission reduction
projects, environment-friendly projects, independent innovation and industrial
restructuring, and post-earthquake reconstruction of Wenchuan Earthquake. By the
end of November, 2009, the central government has cumulatively allocated 862.6
billion, about 95% out of the total investment budget.

B. Encourage consumption
Since consumption is the final demand, another focus of Chinese economic stimulus
package is to encourage consumption with multiple measures, including more
tax-reduction on enterprises and individuals, encouraging “home appliance,
agricultural machine, car and motorcycle to countryside” projects (“building–material
to the countryside” is expected in 2010); substantially enlarging durable consumer
market such as houses and cars as well as agricultural consumption credit market;
pushing ahead health care reform to ease the medical burdens on residents; actively
improving the social security system and implementing the pilots of rural pension
system; enhancing rural and urban minimum living allowance to relieve their worries
about the future and thus raising the marginal consumption; bettering the living
conditions of teachers in primary and high schools; increasing the basic pension of
retired people. All these become important measures for China to cope with the global
financial crisis and boost the domestic demand. As for the projects of “home
appliance to countryside” and “cars and motorcycle to countryside” alone, the central
government put aside 25 billion yuan of subsidy in 2009.
C. Support the export
While devoting great efforts to boosting the domestic demand, the government has
been trying to support the export and then encourage the foreign demand. It has
increased the export refund rate and provided differential refund rate for different
products in different industries. Now its basic guideline is to assist the export-oriented
enterprises to survive this financial crisis. According to the statistics of China General
Administration of Customs, the total volume of import and export reached USD 208.2
billion in November 2009, up by 9.8% year-on-year and by 5.4% period-on-period. It
was the first positive month-on-month growth in 2009. The export in November
registered USD113.6 billion, down by 1.2% year-on-year and up by 2.6%
period-on-period. It was the fifth consecutive month that the export exceeded
USD100 billion. The foreign trade apparently began to recover. While trying to

restructure the domestic and foreign demand, China will speed up its pace of building
a balanced growth pattern which is dominated by the domestic demand and actively
stimulated by the foreign demand.
D. Implement structural tax cut as well as tax and fee reform
Chinese government announced to unify the income tax of both Chinese and foreign
capital enterprises and decrease the stamp duty of share purchases in 2008. Then in
2009 it continued to launch a series of tax and fee reforms to implement the structural
tax cut and ease the taxation burden on enterprises and individuals. For instance, it
comprehensively transforms production-oriented VAT into consumption-oriented one,
moderately decreases the tax and fee on house sales, and reduces the purchase tax of
small passenger cars. Take the VAT transformation reform for example. It cuts the
enterprise tax by over 120 billion yuan. It is estimated that such a large-scale
campaign of structural tax cut and administration fee reduction will ease the burden of
around 500 billion yuan for enterprises and individuals. Although in a short-term,
these measures will enhance the pressure on the central finance, in the long run they
will be conducive to fast and steady economic growth and lay a solid foundation for
increasing the financial revenue while implementing counter-cyclical management.
E. Significantly raise the levels of fiscal deficit and government debt
Under the pressure of economic down-turn, almost all the countries will enlarge the
financial deficit to stimulate the economic growth and China is of no exception. In
order to fill the fiscal gap due to declining revenue and growing government expense,
the central government arranged 750 billion yuan of fiscal deficit, up by 570 billion
from a year earlier. In addition, it was the first time that the State Council permitted
local governments to issue 200-billion-yuan worth of bond through the Ministry of
Finance and under the provincial budget management. The national fiscal deficit
totaled 950 billion, an unprecedented figure since the founding of PRC, which reflects
China’s energetic efforts of mitigating the cyclical downturn. On the other hand,
China kept decreasing its fiscal deficit over the past years and thus has relatively large
room for expansionary policies. Despite the huge increase of annual deficit in 2009,
the deficit-to-GDP ratio and debt-to-GDP ratio are controlled under 3% and 20%
respectively---these two indicators are designed by EU and universally acknowledged
in the world. As for the debt-to-GDP ratio, it is estimated to be around 40% even the
implicit debt of local governments is taken into consideration. In a word, in
consideration of the overall national economic strength, it is safe for China to have
such a huge deficit of 950 billion yuan. This deficit plan reflects the active but prudent
features of Chinese fiscal policies.
(2)This round of proactive fiscal policies feature faster pace of economic restructuring,
optimization of industrial layout, promotion of independent innovation and continue
advance of reforms.
A. Readjust the industrial structure
Among Chinese economic stimulus package, the plan to adjust and reinvigorate 10
key industries attracts most of the attention. The pressure from the external crisis puts
under spotlight the problem of overcapacity in some industries, pushing China to seize
this opportunity and accelerating the industrial restructuring and upgrading. This is
regarded as an important task of strategic significance and concerning the overall
economic performance. As a result, the State Council consecutively held 6 executive
meetings during the 40 days between January 14 and February 25 in 2009, discussing

and then approving the plan to adjust and reinvigorate 10 key industries, such as
shipbuilding, petro-chemicals, light Industry, equipment manufacturing, non-ferrous
metals, textiles, electronics and information technology, autos, iron and steel and
logistics. Its scale and efficiency is rare in Chinese history. Then spurred by the
investment, consumption as well as relevant adjustment and reinvigoration plan, some
key industries witness immediate and remarkable progress. For instance, the prices of
major chemical products increase steadily. Among the 168 products which are closely
monitored by China Petroleum and Chemical association, in March, the average
prices of 81 products increased over the past month. The energy conservation and
emission reduction also made greater progress. According to NDRC’s statistics
released on August 2nd, the energy consumption per unit of GDP decreased
cumulatively by 3.35% in the first half of 2009, the largest progress since the start of
the “Eleventh Five-Year Plan”, up by 0.47% on a year-on-year basis. The industrial
output of up-scale enterprises in six high energy-consuming industries saw a
year-on-year increase of 4.2%, with its growth rate down by 10.3 percentage points
and about 2.8 percentage points lower than the up-scale industries. Their volume of
saved energy accounts for one third of the national energy conservation in the first
half of 2009.
B. Increase financial support on agriculture
The government is apparently intensifying its support on the agricultural development.
In 2009, the central government allocated 716.14 billion yuan for agriculture, farmers
and rural areas, up by 20.2% over the past year. The direct subsidies for farmers’
production and living increased by 19.4% to 123.08 billion yuan, such as direct
subsidies on grains, comprehensive subsidies on farming facilities, subsidies on
growing superior grain cultivators, subsidies on agricultural machinery and tools (see
Table 2). In the four arrays of investment plans for domestic expansion, the central
government allocated 20.05 billion yuan for rural biogas projects, quality grain
projects and standard grain fields. Around 90% of the capital has been practically
allocated in the first quarter of 2009, which is unprecedented and shows how resolute
the government is to increase farmers’ income, improve their lives and optimize the
national economic structure.

   Table 2: Central government support on agriculture, farmer and
   rural areas: a comparison of 2008 fund appropriation and 2009
                                     2008                            2009
 Unit: 100 million yuan          Appropriation             Budget           Growth Rate
 General        expense    on
 agriculture,    woods    and       2702.20                3446.59            27.5%
 Subsidies      on   growing
                                    123.45                 154.80             25.4%
 superior grain cultivators
 comprehensive       subsidies
                                    715.91                 756.00              5.6%
 on farming facilities
 Subsidies on agricultural           39.95                 130.00             225.0%

 machinery and tools
 direct subsidies on grains                    151.09                       190.00                  25.8%
 Subsidies on agricultural
                                                60.50                        79.80                  31.9%
 Expenditures                on
                                              1137.60                       1295.10                 13.8%
 agricultural infrastructure
 Expenditures                on
 comprehensive agricultural                    127.00                       147.00                  15.7%
 Expenditures on poverty
                                               167.30                       197.30                  17.9%
 reduction program
 Expenditure      on    modern
                                                53.99                        65.00                  20.4%
 agricultural production

 Total                                        5955.50                       7161.40                 20.2%
 production-related                           2260.10                       2642.20                 16.9%
 Four subsidies                               1030.40                       1230.80                 19.4%
Note: In one of the attachment tables of the Fiscal Budget Draft 2009, two groups of figures are provided for the
general expense on agriculture, woods and water, one of which is 181.174 billion yuan.
Source: Fiscal Budget Report 2009.

C. Optimize industrial geographical distributions and reinforce the regional
development guidance
Another priority of China’s macro-economic control is to coordinate the regional
development and optimize the industrial geographical distribution. Ensuring the
vigorous efforts over the past two years to build Binhai New Area, the economic
center in North China, and Beibu Gulf Economic Zone in Guangxi Province, the
central government forges ahead the following programs successively: the reform and
comprehensive development in the Pearl Rival Delta, coordinated rural-urban
development reform in Chongqing, development of modern service industry and
advanced manufacturing industry in Shanghai, building Shanghai into the global
financial center and shipping center, speeding up the construction of economic zone
on the west coast of Taiwan Strait in Fujian Province and Guanzhong-Tianshui
economic zone for regional invigoration. All these strategic deployment aims at
fostering new economic growth pole, giving full play to the comparative advantages
in different regions and enhancing the coordinated regional development, which are
bound to exerting positive influence on China’s economic development in the long
D. Nurturing Technology Innovation

Historical experience indicates that the crisis always trigger off a new round of
technological revolution which serves as a crucial engine for the new surge of
economic growth and prosperity. During the several years before this crisis, China
had drawn up and implemented the national guideline on medium-and long-term
program for science and technology development, in the hope of accelerating the pace
towards innovation-oriented nation. On the basis of this program and also in order to
mitigate the impact of the financial crisis, the State Council coordinated both the
central and local finance and pooled 100 billion yuan to advance an array of important
scientific and research projects which are able to bolster the economic growth. In
addition, the government tries to encourage the enterprise development and scientific
and technological innovation through interest subsidy (according to the
newly-released statistics of Ministry of Industry and Information and Technology
(MIIT), the executive meeting of the State Council specifically allocated 20 billion
yuan of interest subsidy fund for scientific innovation in 2009 and the fund has played
desirable effect in initiating 4441 technological innovation projects and attracting
632.6 billion yuan of social capital, 28 times of the government fund). The central and
local investment also speed up the application and promotion of advanced
technologies, strengthen the technological support for the reinvigoration of key
industries and nurturing scientific and technological talents.
E. Keep advancing reform
The urgency of coping with the global financial crisis also creates the opportunity of
advancing Chinese reform. The leadership hopes to deepen the current reform, solve
the problems plaguing Chinese growth and enhance the dynamics of development. In
early 2009, China officially launched the reforms of refined oil price, tax and fee,
which have been deliberated upon for many years. The reform of health care system is
also initiated. In addition, the central government suspends or eliminates 100
administrative fees and continues to stamp out illicit accounts known as “little
coffers”. In April 2009, the executive meeting of the State Council announced the key
tasks of reform, including transforming the economic administrative function of the
government, advancing SOE reform and comprehensive agricultural reform, pushing
ahead the price reform of resource products, institutional reform of service industry,
reform of employment and income distribution systems, encouraging the reform of
scientific and technological system, deepening the reform of fiscal, taxation and
financial systems as well as the foreign trade system reform. These reform measures
aim at solving the major problems in the economic and social development and play a
positive role in enhancing the market confidence and boosting the domestic demand.
They combine the short-term economic control with the mid- and long-term
institutional innovation to solve underlying contradictions, with an eye to facilitate the
mid- and long-term institutional transformation for sustainable development.
(3) Strengthen social security and promote social welfare is the foundation of the
package plan and main highlights
A. Allocate more resources to social welfare improvement
In 2009’s central fiscal budget for social welfare, the fund to encourage employment
increased by 66.7%, the fund for welfare housing project by 171%, the health and
medical expenditure by around 40%, and the education expenditure by 23.9%. In the
first half of 2009, arrays of social welfare housing projects, rural biogas projects, safe
drinking water projects are launched. Large numbers of basic health care facilities as
well as rural primary and high school buildings in the middle and west China are

upgraded. The earthquake-stricken areas are accelerating their paces of
post-earthquake reconstruction. The governments are apparently accelerating the
construction of urban sewage and waste treatment facilities. The welfare level of
low-income group continues to rise.
B. Strengthen social security system
The government continues to strengthen social security system, expand its coverage
and enhance the level of social security. Since January 1, 2009, all the enterprise
retirees could enjoy the practical benefit of new basic pension system. The retirees of
bankrupted SOEs have all been covered by the basic medical insurance system for
urban employees. The pilots of new rural social pension insurance system are also
launched, covering 10% of counties. Over the past two years, the social welfare
housing projects are given more prominence. The construction of low-rent houses
apparently is gaining momentum. The central government allocated 18.4 billion yuan
for social welfare housing projects and increased it to 49.3 billion yuan, up by 170%.
The government will strive to solve the housing problems of around 7.5 million
low-income urban families and 2.4 million families living in shantytowns in forests,
on reclaimed land and around coalmines within three years.
C. Promote the employment
Employment is the basis for people’s well-being. Since the financial crisis makes
people harder to get a job, the central government is sparing no efforts in securing
jobs and promoting employment. The General Office of the State Council issued a
specific notice of advancing the employment of colleague graduates and migrant
workers, trying to take advantage of a series of policy leverage to help colleague
graduates to find jobs and support migrant workers to start their own business at
hometowns or realize re-employment. According to the Ministry of Human Resources
and Social Security, the urban employment increased by 10.13 million from January
to November in 2009, with a monthly average of 920,000 new jobs. This has far
exceeded the yearly target of 9 million new employees. Chinese employment has
basically recovered to the normal level, which means the government’s efforts of
stabilizing the employment achieve initial success. Since the financial crisis poses
serious difficulties on the work and life of migrant workers, the central government
conducts a series of measures to strengthen employment training for migrant workers
and speeds up relatively comprehensive welfare system for migrant workers in terms
of work-related injuries, health care and pension. The pilot programs for their
endowment insurance as well as social insurance relationship transfer and renewal
measures are also under progress. The central economic work conference in
December 2009 paid attention to strengthening the training of migrant workers and
pushing ahead the reform of Hukou system. In early 2001, the first document
officially released by the central government again stressed such issues as training and
guiding new generation of migrant workers while taking into consideration their
practical situation. All these efforts are expected to significantly improve the work
and living conditions of migrant workers.
D. Further reform health care system
On April 6, 2009, the State Council launched the Advices on Deepening the Health
Care Reform, officially unveiling the new health and medical reform. Covering all the
rural and urban residents, the basic medical security system is regarded as the major
policies of CCP and the State Council to mitigate the impact of financial crisis and

facilitate the overall development of Chinese social and economic development, as
well as a major measure to speed up the improvement of the social security system,
the socialist market economy and people’s well-being. According to the national plan,
the government will forge ahead five reform programs within the next three years,
including the reform for the basic medical security and that for the national basic
drugs system. The target is to have the basic medical security system to cover all the
rural and urban residents, to apparently enhance the availability and service of the
basic medical health system, to ease the medical burdens on residents and to
substantially alleviate the problem of difficult and expensive to get medical service.
Therefore, the public finance at different levels will invest additional 850 billion for
these plans.
2. The Practical Effect of Fiscal Policies
Since the fall of 2008, Chinese government has launched a series of regulation and
reform measures which basically reflect the approach and pattern of the new round of
macro-economic control and gives particular prominence to the role of fiscal policies.
Coupled with the monetary policies of expanding the aggregate monetary supply and
improving the economic prospects, these fiscal policies focus on optimizing the
economic structure and increasing the effective economic and social supply. The
economic stimulus package tries to take into consideration both the short-term target
of securing the growth and employment and the long-term target of economic
restructuring. This package tries to expand the domestic demand while stabilizing the
foreign demand, reinvigorate key industries while strengthening scientific and
technological support, improve people’s well-being while strengthening the social
security system, enlarge credit supply and fiscal expenditure while optimizing the
expenditure structure, and keep advancing reform while transforming the growth
Over the past year, Chinese social and economic performance indicate that this
stimulus package has achieved initial success and helped to further enhance the
quality of economic growth. Its major achievements are as follow.
First, it quickly reverses the sliding trend of economic growth and maintains the
momentum of the national economy. In 2009, China succeeded in securing 8% of
GDP growth. Its GDP hit 33.54 trillion yuan, up by 8.7% over the previous year at
comparable prices and with its growth rate down by 0.9 percentage points on a
year-on-year basis. If we examine the growth rate in each quarter, it is clear that the
GDP growth rate was 6.2% in the first quarter, 7.9% in the second quarter, 9.1% in
the third quarter and 10.7% in the last.
Second, the government investment successfully stimulates the economic growth. The
investment for projects concerned about people’s well-being is apparently gaining the
momentum. The total investment in fixed assets amounted to 22.48 trillion in 2009,
up by 30.1% over the previous year and with its growth rate up by 4.6 percentage
points than 2008. To be specific, the urban investment in fixed assets went up by
30.5%, with its growth rate up by 4.4 percentage points, while the rural investment in
fixed assets increased by 27.5%, with its growth rate up by 6.0 percentages points.
The investment for livelihood-related projects saw a surge in 2009. The investment
for infrastructure construction (excluding power-generating facilities) soared by
44.3%. The investment for health, social security and social welfare was up by 58.5%,
which laid a solid foundation for China’s stable economic growth and social harmony
in the long run.

Third, the industrial production experienced a quarter-by-quarter recovery and its
profit turned from negative growth to positive growth. The above-scale industrial
added value in 2009 increased by 11.0%, with its growth rate down by 1.9 percentage
points. To be specific, it increased by 5.1% in the 1st quarter, 9.1% in the 2nd, 12.4%
in the 3rd and 18.0% in the 4th. If we examine it sector by sector, it is clear that all the
39 sectors realized year-on-year growth. The production and marketing situation of
industrial enterprises was fairly good. The ratio of sales to production in above-scale
industrial enterprises hit 97.67%.
Fourth, the domestic consumption increases in a steady way. The total retail sales of
consumer goods amounted to 12.53 trillion yuan in 2009, up by 15.5% over the
previous year. Its real growth registered 16.9% after deducting price factors, with its
real growth rate up by 2.1 percentage points on a year-on-year basis. The private
consumption steadily beefed up. The floor space of national commercial housing sold
amounted to 937 million square meters, up by 42.1% over the previous year.
Fifth, the residential income increases continuously. The large amount of investment
and policies for people’s well-being are translating into the practical benefits for
people. In 2009, the per capita disposable income of urban residents increased by
8.8% compared with 2008. Its real growth rate was 9.8% after deducting the price
factors. The per capita net income of rural residents was up by 8.2%, with its real
growth rate at 8.5% after deducting the price factors.
3. Experience and Reflection
(1) The basic experience of Chinese fiscal policies
This round of proactive fiscal policies tries to balancing the relationship between
expanding the aggregate supply and restructuring the economic structure, as well as
the relationship between dealing with the current difficulties and realizing sustained
and fast economic growth. The government policies put more emphasis on
transforming the growth pattern and enhancing the quality and level of economic
growth. To summarize, firstly, China integrates the measures against financial crisis
into the framework of counter-cyclical policies. Its government realizes how serious
this once-in-a-century financial crisis was and thus decides to expand the aggregate
demand and supply in a timely, forceful and resolute manner. Secondly, China takes
into consideration its current situation and development stage and exercises
differential treatment from the perspective of supply management. It tries to optimize
economic structure, substantially enhance the effective supply, and promote the
transformation of growth pattern. Thirdly, China pays attention to preventing potential
risks and strengthening current system, while putting forward progressive measures.
Generally speaking, proactive fiscal policies increase public expenditure and reduce
taxes by a large scale. They take into consideration both the speed and quality of the
economic growth. All these efforts manifest the government’s efforts toward
human-oriented growth pattern, its scientific outlook of comprehensive, coordinated
and sustainable development as well as the guideline of promoting the overall social
and economic development. They indicate that Chinese government’s skills and
thought/insight for macro-economic control are gradually evolving, which lays a solid
foundation for its sustained and fast economic growth in a complicated post-crisis
(2) Reflections on Chinese fiscal policies and directions of improvement

Undoubtedly there are no such things as perfect policy designs and practice. We need
to reflect on the proactive fiscal policies which will be continuously carried out in
2010 so as to better them as much as possible. There are three aspects that need
further improvement.
A. The government should pay more attention to economic restructuring and
implementation of investment projects while trying to expand the aggregate demand
and supply and making investment plans.
As noted, the economic stimulus package gives priority to government investment for
aggregate volume expansion so as to enlarge the domestic demand. The huge fund of
4-trillion-yuan has been distributed to various specific projects. 1.18 trillion yuan out
of it comes from the central finance. It is used to attract local supportive funds and to
stimulate local, banking and enterprise development. In addition, the government has
to carefully steer the direction for adjusting and optimizing the economic structure
and prudently select specific projects in seven major fields, namely infrastructure
construction, post-earthquake reconstruction, agricultural development, comfortable
housing projects, environmental protection, independent innovation, and education,
culture and health. In addition to maintain people’s well-being, cultivate new sources
of economic growth (such as new energy), and try to attract social and private
investment, the government also gives particular prominence to economic
restructuring and transformation of economic growth pattern, and tries to achieve this
goal by guaranteeing the quality of every invest project. It should rely on adequate
systems to fulfill these objectives. Firstly, it should conduct strict and adequate
feasibility analysis (not approvability analysis) and stick to the principle of structural
optimization. Secondly, the government should supervise these projects in a
comprehensive and strict way and conduct multiple internal and external audits to
avoid any problems such as capital embezzlement. Thirdly, the government should
conduct standard and adequate project supervision to guarantee their quality and avoid
jerry-built projects. According to the lessons and experience in the last round of
proactive fiscal policies, the government should supervise, audit and guide the
ongoing and planned government investment projects as well as joint investment
projects so as to detect the potential risk in a timely way.
B. Pay attention to system transformation while beefing up the fiscal public expense
and subsidy
Expansionary policies usually adopt such key instruments as providing pubic budget
and subsidy for agricultural development, social security, social service, R&D and
innovation. Of course, it is a must for government to allocate more funds for these
areas, but it is far from enough. Another necessity is to transform relevant public
expense and subsidy systems so as to enhance the efficiency of these funds and
policies. It is proved that the effect of policies will be directly influenced by
underlying systems. For instance, Chinese government has provided large numbers of
projects and funds to support issues concerning agriculture, farmers and rural issues,
but some funds are not properly used without any priority. Therefore the central
government should encourage local governments to explore the best way of
coordination and integrate the implementation mechanism of these projects and funds
in a proper way. Some local governments have made progress in their pilot efforts and
need to summarize successful experience. Local governments should formulate
feasible policy objectives based on their practical situation of comfortable housing
projects and housing market, as well as local economic development. They should

define several guidelines of government expense. For example, should they provide
house subsidies on the basis of houses or number of family member, or rather
combine the two patterns together? How to make full use of limited fund for low-rent
house projects to safeguard the basic housing security? How to guide and support
increasing supply of affordable rental houses to satisfy the requirement of
middle-income and your employees who cannot afford the house. In consideration of
the above issues, the government has to figure out specific, feasible and reasonable
programs so as to make full use of the government financing for comfortable housing
projects (there is already successful experience in this regard). Another example is the
fiscal regulation and controls for the pork price. It is fairly necessary for the
government to summarize the past financial practices and explore counter-cyclical
mechanism and new mechanisms of directly subsidizing rural and urban low-income
residents instead of subsidizing the production. In terms of the fiscal support for basic
R&D, the government should intensify its efforts of building a mechanism to
encourage laboratories and large experiment facilities to share and integrate resources.
This is not only the inherent request to improve public financing system and optimize
macro-economic control, but also an inevitable issue about institution building during
China’s economic and social transition.
C. Pay attention to risk prevention while enlarging the national debt
The expansionary policies result in significant increase of national and local debt.
Except for the conventional long-term treasury bonds and 200 billion yuan of local
debt, recently there emerges so-called “carnival of local financing’ in China and a
surge of various financing platform and instruments (these instruments are not
necessarily innovative). The local governments are quickly expanding their scale of
debt financing, which have raised widespread public awareness and disputes.
Under its market economic system and multi-level taxation system, such a surge of
financing is actually inevitable, not to mention the huge demand produced by the
4-trillion-yuan investment plan. It will not work to prohibit such activities in an
oversimplified way. Thus Chinese government should resort to ancient wisdom of
“dredging the flood instead of blocking it”. In other word, it should guide action
according to circumstances and strive for health development by building adequate
Under such circumstance, Chinese government should design a risk-controllable and
sustainable financing mechanism and regulations for local financing. This is not only
a challenge but an opportunity for Chinese proactive fiscal policies. According to the
requirement of building public financing system and the guidelines of “managing
public finance in a law-abiding, scientific and democratic manner, local financing
system should be transparent and be subject to laws, regulation and public supervision.
Of course this is not a task that can be achieved overnight. The government should
pay attention to the following urgent matters. First, require national authorities to
supervise, guide and coordinate the scale of local debt in a top-down, forceful and
comprehensive way. Secondly, strengthen the power of local People’s congresses and
political consultative conferences in monitoring and auditing the government
financing. Thirdly, strengthen the role of financial market authorities in supervising
and auditing the government financing. Fourthly, encourage local governments to
strengthen the self-discipline and management in their financing efforts and to
summarize their experience and lessons so as to take preventive measures in
innovation practice. The government could draw up the outline of relevant

mechanisms at first and then continue to improve and specify them by trial and error.
Without the effective binding of regulatory mechanism and disciplines, local
financing is likely to be fragmented and opaque and thus continue to incur public risks.
Once these risks result in the breakout of crisis, it will be extremely costly to deal with
it. The only correct choice is to build transparent and disciplined financing system.
There is still a long way to go towards this goal and thus the government should spare
no efforts in pushing forward the institutional and management innovation.
III. Exit From Fiscal Stimulus Policies
Thanks to the extraordinary economic stimulus package, China’s domestic economy
has showed great momentum of recovery, with investment and industry rebounding
substantially and consumption increasing stably. Data from National Bureau of
Statistics show that, after turning positive in last November, China’s CPI rose 1.9%
year on year in December, much larger than 0.6% in November. Meanwhile, The PPI
returned to positive territory in last December to increase by 1.7%. These show that
after bottoming out, China’s economy entered a recovery track, and that we should
pay close attention to inflation expectations. Global economic recovery in 2010 seems
more vigorous than previously anticipated. IMF forecasted 3.9% growth in 2010 and
4.3% growth in 2011, with China’s economy surging 10% in 2010 and 9.7% next.
With recovering economy and increasing inflation expectations, the issue of
unwinding proactive fiscal policies has come under spotlight. A proper exit strategy
entails an effective combination of timing, pace, process and instruments, as well as
coordination and game play between China and other economic superpowers. At a
time of precarious global economic recovery and fragile endogenous growth at home,
the Chinese government should assess situation comprehensively and carefully before
exiting fiscal stimulus policies.
1. Selection of Exit Mechanism
A proper exit mechanism contributes not only to the smooth disengagement from
economic stimulus policies, but only to the rebalancing of domestic economic
structures and the transition of China’s growth path. The exit mechanism usually
means the official unwinding of the special economic intervention policies put in
place to weather an economic crisis or to lessen its adverse consequences. Generally
speaking, three major instruments are in the macro-control toolkit of various
governments: fiscal policy, monetary policy and moral suasion (a persuasion tactic
used by heads of government, central bankers, etc. to influence and pressure financial
institutions into adhering to policy). Special stimulus policies mainly take three forms:
large scale governmental investment and expenditure, tax reduction and bank
recapitalization. There is no big difference in China. Special stimulus policies must be
coupled with proactive fiscal policy and easy monetary policy, and should be adjusted
timely to reflect specific circumstances and should be unwound at the right time.
The optimization of China’s monetary policy in 2010 can be seen as a move in the
direction of “moderately tight” monetary policy, while the overall stimulus package
remains unchanged. The adjustment of fiscal policy in this year will not be parallel to
that of the monetary policy. It can be viewed as an effort to highlight priorities,
optimize economic structure and pinpoint outcomes under the expansionary policy
environment. The exit strategy in this future will likely be similar to the “fading out”
mode after the 1998 Asian financial crisis, with stimulus measures downplayed,
decreased in strength and unwound without public notice.

China’s exit mechanism from proactive fiscal policies should take into account the
following three aspects: to control the scale of treasury bonds and gradually reduce
the fiscal deficit in the light of GDP growth rate; to guide and encourage private
investment and spur economic recovery and endogenous growth; to act differently in
different industries and with different policy instruments.
(1) To control the scale of treasury bonds and the deficit ratio to optimize the structure
of bond issuance and fund utilization in the light of the scale and growth rate of GDP
With proactive fiscal policy still in place in 2010, the issuance of treasury bond cannot
be downsized abruptly. Rather, the scale of bond issuance should be controlled to
keep the deficit ratio under 3% and to optimize bond structure in accordance with the
scale and growth rate of GDP. The deficit ratio of 2010 will be similar to that of the
previous year with the fiscal deficit exceeding 1 trillion yuan. It is anticipated that the
amount of provincial bonds issued by the central government will be around 200
billions yuan, similar to that of last year. To optimize bond structure, the issuance of
long-term national construction bonds should be downsized according to actual needs,
while medium and short-term treasury bonds with strong liquidity should be
prioritized. The rate, duration, structure and interest patterns of treasury bonds should
be adjusted timely to reflect market demand, so that the issuance of bonds can be
more supportive of the fiscal policy. In 2010, funds raised by treasury bonds should
be focused on supporting ongoing projects, while new projects should be strictly
controlled and closely monitored.
(2) To actively guide and boost private investment and consumption to facilitate
economic recovery and endogenous growth.
The current sign of China’s economic recovery is mainly a result of pump-priming.
Successful economic development cannot be based on public investment only.
Various measures should be taken to stimulate private investment and consumption. If
private investment and consumption remains weak, sustainable economic
development is unattainable. The exiting from fiscal intervention policies should be
attempted after the turning point that private investment and consumption has become
the main growth driver.
China's Central Economic Work Conference has pledged to enhance the vitality and
competitiveness of private sectors and small enterprises, and also to facilitate market
access and protect the legitimate rights and interests of private investment. China’s
fiscal policy should be focused on the following areas: First, investment fields and
channels should be broadened. The government should make full use of opportunities
rising in tackling the financial crisis to entitle social capital to national treatment.
Social capital should be able to hold stakes in various sectors such as finance, railway,
highway, aviation, telecommunication, electricity and urban water supply, unless it is
otherwise prescribed by any law. Second, the government should try to support SMEs
(small and medium-sized enterprises) through fiscal interest deduction, government
procurement, credit guaranty and other ways. Preferential income tax scheme should
be provided to small enterprises. Administrative and institutional fees need to be
cleaned to reduce the burden on enterprises. Special funds for development of SMEs
should be expanded in size and range to prioritize the support of export-oriented
enterprises in sectors such as textile that are most severely hit by the global financial
crisis, high-tech enterprises and SMEs in the earthquake-stricken area. Government
procurement should also tilt towards SMEs. Third, the government should support the
development of financial institutions tailored to serve SMEs. Convenient and efficient

policy-oriented financial services should be provided to mitigate the financing
difficulty of SMEs. In addition, the government should consider setting up local
government financing platforms to attract bank loans and social capital in a
market-oriented approach, to combine the requirements of short-term policy control
and long-term mechanism of utilizing social and private capital.
To boost private consumption, a series of measures should be carefully implemented
and strictly managed such as increasing household income, supporting low-income
groups, improving the social security system to reduce precautionary saving, etc.
C. To act differently in different industries and with different policy instruments
The action of exiting is usually one-way descending in policy intensity. However,
considering the apparent structural problems in China’s economy, the government
should act differently in different industries. For example, stimulus policies in
traditional industries should be abandoned more quickly and thoroughly. Stimulus
measures should remain intact or ever intensified in emerging and backbone industries
which contribute to structural optimization and technological upgrading. More funds
and preferential policies should be directed at these areas to accelerate structural
reform and transition of growth pattern.
Moreover, China is in the process of system transformation and deepening the reform.
Attention should be paid to the coherency between different policy instruments.
Stimulus measures with direct or more administrative interventions such as
expansionary government investment should be reduced together with or faster than
the overall exiting process. On the other hand, effective market-oriented economic
levers such as structural tax deduction could remain in place for a longer time so as to
facilitate optimization of policy arrangement and macro-control approaches.
2. Timing of the Stimulus Policy Exit
When determining the timing of the stimulus policy exit, the government should
consider both the influence of exit policies in other major economies and the actual
state of China’s economy. Stimulus policy exit can only be attempted after the turning
point of the economic cycle has arrived. Based on China’s past experience, especially
experience in the 1990s, it usually takes several years for the economy to transit from
upsurge to downturn and back to upsurge again. It is a cycle of economic downturn
and start of expansionary policies----economy bottoming out---stabilizing and
recovery----consolidating the upward trend----widespread good expectations and
recovery of private investment. It is critical that the endogenous dynamics can
stabilize the economy around the potential growth rate without expansionary policies.
Based on China’s macro and micro economic data, at least in 2010, it is not the right
time for China to exit from expansionary fiscal policies. As Hans Timmer, Director of
World Bank’s Development Prospects Group has pointed out, an early withdrawal of
stimulus measures could jeopardize economic recovery. Although the chance for a
second wave of recession is slim, some counties are likely to witness negative growth
for over a quarter. If stimulus measures linger too long, private investment will be
crowed out and inflation will incur. The reemergence of global imbalance will compel
central banks to tighten monetary policy, which can lead to a second wave of
recession. The global economy is in a sensitive and precarious period. Policy-makers
in various countries face the challenge of safeguarding the hard-won recovery
momentum while at the same time avoiding significant inflation which may result
from delaying the stimulus policy exit. Endogenous economic growth in developed

countries is still very weak. Industrial production and private consumption cannot
recover substantially in the short run. Especially the unemployment rates in the US,
EU and Japan are the worst in more than a decade, which, in turn, will keep private
demand sluggish for a significant period of time. The economic growth in developed
economies in 2010 is likely to be slow and precarious, with the risk of suffering from
a second wave of recession. This is why countries are cautious about an early
withdrawal of the stimulus policies. Jim Rogers, former co-founder of the Quantum
Fund and world-renowned investor predicted in February that as a result of the
previous stimulus policies in various countries, the global economy may experience a
second wave of recession after the end of the “superficial rebounding”. The second
wave may arrive in late 2010 or in 2011, and is likely to be more damaging than the
2008 financial crisis. The recent sovereign debt crisis in the euro zone has shown
signs of intensifying, drawing worldwide attention. It exposes the fragility of the
coordination system between countries in the euro zone and the potential risk that EU
may encounter on its road of development. This crisis has also impelled the Chinese
government to be more prudent in the formulation of future macro economic policies.
Although China’s economy is on the track of overall recovery, severe structural
problems persist. The expected inflation has yet to materialize, but the CPI will surely
go up this year. This rise may be mild in 2010, but more damaging upward pressure
could emerge next year. If the global economy is severely hampered by the financial
turmoil in the euro zone, it is impossible for China to stay out of the crisis. It is not
impossible that the inflationary pressure will be turned into deflationary pressure
abruptly as in H2 2008. In a word, to choose the best timing for stimulus policy exit,
the Chinese government must analyze various forecasts and relevant factors, track and
assess the momentum of economic development, view China’s economy in a global
perspective to decide the turning point for stable endogenous development.
3. International Coordination on Fiscal Stimulus Policy Exit
After the financial crisis, various governments have decreased their interest rates to
historical lows and have spent huge amount of money to bail out the banking system,
which lead to excess liquidity. In the post-crisis ear, monetary authorities are
considering withdrawing liquidity. But at a time when the risk of excess liquidity is
coupled with bleak global economic outlook, international coordination on the mode
and timing of exit strategy is obviously a formidable task. United Nations, the World
Bank and IMF have constantly warned that if timing, mode and scale of the exit
strategy is not properly managed and coordinated in various countries, the global
economy faces the risk of a second wave of recession. At the World Economic Forum
in Davos, George Soros has warned against an early withdrawal of stimulus programs.
He holds that it is still too early to cut governmental expenditure, saying it may lead to
a second wave of recession. He pointed out: “I think that since the adjustment process
to the recession is incomplete, there is a need for additional stimulus.” And despite
political resistance, governments have “plenty of room” to increase their deficits.
China has increased communication and coordination with the US, EU and other
major economies in battling the global financial crisis and in implementation of
economic stimulus policies. International coordination must also be effectively carried
out in the exiting process. Viewed from a global perspective, rescue packages in
major economies have similar crowding out effects. If exit strategies in various
countries differ substantially in time or pace, global economic recovery will be
hampered, with extra exit costs paid. If one country chooses to withdraw first while
other nations keep or intensify their stimulus policies, it is difficult for the exiting

country to achieve desired outcomes. Therefore, multilateral coordination and policy
synchronization should be enhanced. Well-coordinated exit strategies will help to
ensure the stability and continuity of public finance in various countries and to
prevent the negative chain reaction resulted from political game play.
IV. Goals and Challenges of Fiscal Policy in the Post-crisis Era
Amid complicated and changing international environment and numerous difficulties
in domestic economic and social development, China’s Central Economic Work
Conference closed on December 7, 2009 has set the tune for economic development
in 2010: When China’s economy is stabilizing and recovering, attention should be
paid to ensure the continuity and stability of macro policies. More efforts would be
made to enhance the focus, flexibility and effectiveness of economic policy and to
promote the transformation of the economic growth pattern. More efforts should also
be laid on improving people’s livelihood and optimizing economic structure to
increase endogenous dynamics for economic growth. Forward-looking adjustments
should be made on goals and measures of the fiscal policy. In the period ahead, while
continuing to implement the Scientific Outlook on Development and counter-cyclical
macro policies to boost private demand and facilitate growth, the government should
try to strike a balance between maintaining stable and rapid economic growth,
accelerating structural adjustment and managing inflation expectations. While being
“discretionary”, the fiscal policy should focus on facilitating restructuring,
maintaining necessary policy continuity and improving optimization and fine-tuning
efforts. In addition to carefully implementing exiting policies, more efforts should be
made to accelerate structural adjustment, promote development of science and
technology, improve people’s livelihood and to cultivate dynamics for a new round of
economic growth. Well-conceived plans should be prepared to cope with various
1.Goals and Principles of the Fiscal Policy
(1) Goals of proactive fiscal policy
The basic goals of proactive fiscal policy for the next period of time are: To
coordinate with the monetary policy to achieve overall balance; To promote structural
optimization and transformation of economic growth pattern; To facilitate sound and
rapid economic development and to enhance social harmony.
The focus of the fiscal policy should be clearly on facilitating structural optimization
and accelerate transformation of economic growth pattern. China’s economy has
moved from slow growth in H1 2009 to fast growth in H2 2009. The major problem
targeted by the macro control has, to a large extent, shifted from “insufficient
demand” to “structural constraints”. Structural problems such as overcapacity,
extensive development, low-level redundant construction, low consumption rate, etc.
have become heavy burdens in China’s modernization drive and its endeavor to build
an overall well-off society in the medium and long run. Their negative impacts are
becoming more evident with economic and social development. Now at a time when
the deflationary pressure has disappeared and the anticipated inflationary pressure is
yet to materialize, the government should make best use of this time window to take
more active measures with great determination to facilitate restructuring,
transformation and reform, and to combine short term regulatory policies with
medium and long-term objectives. In the next period of time, China’s fiscal policy
should be coordinated with the monetary policy to maintain the expansionary thrust.

Meanwhile, more efforts should be laid on structural optimization. Every specific
program in the 7 major fields (including infrastructure, post-disaster reconstruction,
new rural construction, affordable housing, environmental protection, independent
innovation, and scientific, educational, cultural and sanitarian hardware facilities) of
the “4-trillion-yuan” investment plan should be carefully selected and implemented.
In areas such as expenditure allocation, income distribution and policy orientation,
more efforts should be made to improve people’s livelihood and private consumption,
and to promote innovation, energy saving and emission reduction, industry
revitalization and upgrading, etc.
(2) Principles of proactive fiscal policy
In the next period of time, in addition to being discretionary, policy measures should
mainly be economic in nature and should be closely connected with deepening the
In the process of facilitating structural optimization and transformation of growth
pattern, one important thing is that the government should mainly rely on economic
means. The effect of administrative means is limited in a market-oriented economy,
while its side effect severe. The use of legal means should be strengthened, but
perfection and refinement of the legal system is a long and slow process. What’s more,
the main function of the legal system is to set the framework and principles.
Numerous examples show that, the government is not necessarily right on specific
programs, but it is usually right on deciding the directions. Take the program of
energy saving for example, within tens of thousands of enterprises, which enterprises
and which technical routes are more competitive in the energy saving endeavor? The
administrative means usually can do nothing about this, while the law is focused on
maintaining and safeguarding rules and environment for fair play. This question can
only be solved by competition. Actually, to advance structural optimization, the
government only needs to decide a right direction and the law sets a framework for
fair competition. Much work should be left to economic means (levers), which can
formulate a series of tax or preferential measures that are in accordance with industrial
and economic policies. Various enterprises are then left to compete to decide which
ones will win out. In this way, optimal resource allocation can be achieved.
In addition, adjustment of policies and measures should be closely connected with
deepening the reform. In the whole process of China’s economic and social transition,
promotion of deepening the reform and transiting the system must be an integral part
of China’s macro control policies. Fiscal policies and measures must conduce to
deepening the reform in areas such as investment system, finance and tax system and
income distribution system.
2.   Key Areas for Fiscal Policy Regulation
(1) To eliminate backward production capacity and promote upgrading
Elimination of backward production capacity is imperative to the transformation of
economic growth pattern, the improvement of the quality and efficiency of economic
growth and the effective handling of the global financial crisis. It is also warranted by
the necessity to advance energy saving and emission reduction and to actively fight
global climate change. Progress has been made in some areas in elimination of
backward production capacity, but in some sectors, this problem is still very severe.
The government should take more effective measures and comprehensively use
economic, legal, technological and necessary administrative means to accelerate the

elimination of backward production capacity. Special importance should be attached
to the use of economic means in the elimination of backward production capacity and
structural optimization. A competitive environment should be forged to facilitate the
withdrawal of backward production capacity. Among all the measures, taxation
deserves special emphasis, which is an important instrument based on the rule of law.
Differential treatment on resource tax, consumption tax and environmental tax should
be applied to eliminate backward production capacity and to promote structural
optimization. In order to promote the transformation of economic growth pattern, the
taxation and relative prices of resource factors, whether in production or in
consumption, should be raised. This will stimulate various parties to use resources and
primary products more efficiently and to develop energy saving processes, products
and techniques. This will also impel households to consume in a more energy-saving
and environment-friendly way. Based on long-term objectives or urgent current needs,
this kind of economic lever should be used more frequently and more effectively.
(2) To improve social security system and to rationalize the distribution of income and
enhance consumption
Increasing the contribution of consumption to economic growth is vital for China’s
long-term sustainable development. Without significant recovery of export, expansion
of private demand, especially consumer demand, plays a large role in promoting
stable economic development and solving problems such as overcapacity and
irrational economic structure. Irrational distribution of income and weak social
security system are important factors that hinder the expansion of household
consumption and stable economic growth. In 2010, based on lessons learned, more
efforts should be made to train rural migrant workers and to accelerate the
construction of the social security system featuring urban-rural integration, along with
the urbanization process and reform of the house register system. In order to enhance
household consumption, the government should, first of all, increase the financial
support for urban and rural low-income groups to expand their spending power.
Secondly, existing stimulus policies aiming at boosting consumption should be
continued and improved. Such policies include those that enable rural residents to
purchase home appliances, cars and motorcars, and construction materials on
favorable terms, and also those that enable exchanging old cars for new ones. Thirdly,
more attention should be paid to the creation of favorable conditions for expanding
spending power by accelerating the construction of social security system and
increasing financial investment in social security to reduce precautionary savings.
Fourthly, instruments, such as taxation, that help to redistribute the income should be
optimized and strengthened, so as to prevent irrational income disparity.
(3) To promote regional coordination and poverty reduction
In China, it is particularly important to increase transfer payments to middle and
western regions so as to narrow regional income disparity. The transfer payment
system should be improved by increasing general transfer payment and optimizing
special transfer payment. Meanwhile, with reference to regional functional planning
and revitalization plans, the government should improve the design and formula of the
“factor method”, formulate an institutionalized transfer payment system for ecological
compensation, and enable residents in restricted (agricultural and pastoral areas) or
prohibited development zones (conservation areas) to enjoy the benefits of reform and
opening including basic public services. In poverty reduction, apart from increasing

financial support, what is more important is to forge a “blood making” new
mechanism that can enhance the performance.
3. International and Regional Coordination of Fiscal Policies
In the “post-crisis era”, China should make full use of the bilateral and multilateral
channels and frameworks with the US, Japan, EU, ASEAN and other major
economies to facilitate communication and dialogue and to promote policy
synchronization and mutual benefits. Trade protectionism and burger-thy-neighbor
policies are harmful to the development of human society. On numerous occasions,
the Chinese government has advocated coordination and win-win solutions. In the era
of globalization, international and regional coordination is also imperative for China’s
own development. In this regard, sincerity is matched with interests: in the post-crisis
era, trade protectionism and the uncoordinated approach in one country will not only
harm other countries, but will eventually hurt that country per se. Together with other
economies, China should act as a responsible stakeholder in international and regional
coordination of fiscal policies.
4.   Major Challenges in the Next Stage
(1) Proper guidance and risk prevention of financing mechanisms for local
In the expansionary period warranted by stimulus policies, the size of national bonds
and local government bonds has risen significantly. Apart from long-term
construction bonds and 200 billion yuan worth of local government bonds, China’s
local governments have experienced what was called “a carnival of financing” with
existing financing platforms booming and new financing instruments (usually less
regulated) created. The rapid increasing of local government debt financing has
attracted close attention from relevant authorities. Controversies have also arisen.
Relevant authorities are busy formulating a guidance document. In the market
economy and China’s multi-level tax-sharing financial system, the development of
local government financing is hardly surprising. What is crucial is to ensure its
healthy development by effective guidance and regulation. A series of measures
should be taken to mitigate existing debts, broaden official financing channels,
prohibit unregulated backdoor financing and to strength regulatory mechanisms. The
government should formulate relevant regulations to ensure safe, sustainable and
transparent operation of local government financing. In the expansionary period, this
is both a challenge and an opportunity. In accordance with the principles of managing
public finance in a law-abiding, scientific and democratic manner, local government
financing should be transparent, regulated by laws, regulations and disciplines, and
monitored by the general public. The formulation of pertinent rules, laws and
disciplines should be advanced in a gradual manner. Broad frameworks can be
worked out first and then to be continuously perfected and refined. By issuing bonds
on behalf of the local governments, China’s Ministry of Finance is actually providing
a de facto financial assurance to the annual issuance of 200-billion-yuan local bonds.
The fund raised by the bonds is listed in the budget of provincial governments, and is
thus monitored by the entire budget process. Provincial governments are held
responsible for the settlement of principals and interests. This is a big step in
standardizing the local government financing system. This process is more transparent
and regulated than the approach of “re-financing” national long-term construction
bonds in 1998 after the Asian financial crisis. More efforts should be made in the
future to improve its standardization and operational effectiveness.

In addition, when developing the platform for local government financing, the mode
of issuing long-term construction bonds can be experimented. This proposed mode is
based on some regional practices. Usable special funds of the local governments can
be invested as equity in enterprises and other selected (or newly established) legal
entities. Working as a financing platform to attract social capital, these entities will
bear the responsibilities of fulfilling construction tasks dictated by the special funds
and settling the principals and interests of the bonds. By this means, a regulated and
powerful local government financing platform is established, which meets the
requirements of financing system reform and long-term development.
The benefit of this approach is that by investing national debt fund to local enterprises,
corporate capital can be formed or increased. The enterprises can further increase their
capital by attracting bank loads or issuing corporate bonds, taking advantage of
China’s huge bank deposits and considerable social idle funds. By so doing, long-term
local government financing platforms can be established which can constantly provide
funds for construction efforts. Meanwhile, because specific supervision methods have
been formulated to monitor the use of financial funds, funds invested in enterprises
can be closely reviewed and supervised to prevent internal abuses and to urge the
settlement of principals and interests. The limitation of this proposal is that it demands
scientific decision-making of the local government in selecting projects and
establishing legal entities and financing platforms, which is a highly difficult task.
Under the increasingly refined performance evaluation framework for public finance,
if major problems occur in the enterprises acting as the financing platform for local
governments, relevant officials will be held accountable for the failure. This pressure,
on the other hand, will stimulate standardization and thus is positive and beneficial.
In the long run, a transparent and comprehensive financing system based on rule of
law should be established which will cover the issuance of central and local
government bonds, various policy-oriented and commercial financing. In this system,
risks of local government financing will be prevented as a result of rule and law, and
institutional and public supervision.
(2) To strike a balance between tax reduction and spending expansion
When sticking to the proactive fiscal policy, the government should try to strike a
balance between tax reduction and spending expansion. First of all, policies of
reducing tax and increasing spending should be considered with the aim to promote
structural optimization. Tax reduction usually contributes to economic growth by
expanding demand. But currently in China, “structural tax reduction” is often
combined with tax reform and economic restructuring. While expanding demand, it
also seeks to increase effective supply and facilitate structural adjustments. Policies of
spending expansion are also aimed to promote restructuring. The government adopts
policies of tax reduction and spending expansion together so as to maximize domestic
demand. Secondly, attention should be paid to the quantitative relationship between
these two policies. When both are in application, the government will face
considerable financial pressure, which, if mishandled, may turn into a financial
turmoil. The government should consider its own financial sustainability, and decide
the best combination of the two policies in the safe zone.
5.   Key Policy Proposals
(1) To control the deficit at a reasonable level by strengthening monitoring and

Adoption of the proactive fiscal policy to increase government deficit and issuance of
treasury bonds is a necessary measure taken by the government to tackle the global
financial crisis. In 2009, China’s fiscal deficit amounted to 950 billion yuan, highest
in 60 years since the establishment of the New China. But it accounted for less than
3% of the GDP. Considering China’s overall economic and fiscal strength, the risk is
totally under control.
However, early warnings are necessary, because persistent fiscal deficits will bring
about many problems. To cover the deficit, the government will have to issue more
treasury bonds or increase taxes in the futures. As a countermeasure, the government
can, on the one hand, optimize the structure of public debts and lower its financing
cost. On the other hand, the structure of fiscal expenditure should be optimized to
focus bond funds on construction of infrastructure in key areas, improving people’s
livelihood, and advancing innovation, energy saving and emission reduction. The
emphasis should be on increasing the effectiveness of fund use and enhancing
dynamics for economic growth. In addition, an effective fiscal risk monitoring and
warning system should be established in the macro management department to keep
the size of fiscal deficit within the safe zone.
(2) To seize the opportunity to implement structural tax increase
As a result of the global financial crisis, the government will face strong financial
pressure in the coming years due to its implementation of tax reduction and spending
expansion policies. Now that China’s economy is recovering, the government can
consider seizing the opportunity to increase resource and energy taxes, which will
mitigate the financial pressure on the government. The focus of structural tax increase
is on structural adjustment and optimization. It can go hand in hand with structural tax
reduction, both serving the same regulatory purpose.
It is right time to make full use of the economic lever of resource tax. Viewed from
the macro-environment, the deflationary pressure has disappeared while the
anticipated inflation is yet to materialize. Enterprises are in better financial positions
with the economy on the track of recovery. The government should seize the
opportunity to make upward adjustment to the resource tax. The focus of the
resources tax adjustment plan should be on washing out overcapacity and backward
enterprises while facilitating the development of most enterprises through energy
saving and emission reduction efforts.
In the short and medium-term, resource tax in the energy production process should
be adjusted upward. Specifically, quantity lump-sum tax of fossil energy
(non-renewable energy) and mineral resources should be increased, significant ad
valorem duties should also be levied (In localities where conditions permit, resource
tax can be linked with proved reserves). In the second place, on top of the fuel
consumption tax, taxation on coal and other fossil energy consumers should be further
increased. The Chinese government can learn from the European experience of
“carbon tax” in this respect. A series of tax relief and other preferential policies
should be applied to facilitate the development of wind energy, solar energy, biomass
energy, geothermal energy, tidal energy, remnant heat collection and utilization, etc.
Preferential and supporting measures should be provided to policy-oriented and other
financial institutions that help to finance these projects. While raising fossil energy
taxes, two complementary schemes should be considered. First, the government
should ponder on other necessary measures that increase the financial burden of
producers, such as the establishment of royalty system, mining property right system,

ecological compensation and renovation fund system, margin deposit for safety in
production system, etc. Secondly, the impact on low-income groups should be
assessed. In China’s current energy structure, this type of energy accounts for the vast
majority. Price rise and its conduction effect will have considerable impact on
low-income groups. When implementing tax increase polices, the government should
consider providing them with certain amount of direct subsidies. This can be done
within the minimum living guarantee system. The adjustment of china’s resource and
energy taxes cannot be designed alone, rather it should be an integral part of the
optimization plan of environment, energy and taxation polices.
V Conclusion
Although the impact and adverse influence of the global financial crisis is huge, the
Chinese government has taken prompt and effective measures. The fiscal policy
played a crucial role in the economic stimulus package.
China learned from the experience of other market economies when formulating fiscal
and other policies to overcome the crisis, especially China benefited a lot from its own
experience of implementing expansionary polices after the Asian financial crisis in
1998. That is why, when discussing China’s exiting from expansionary fiscal polices
in the post-crisis era, it is obvious that the Chinese government will learn from its
successful “fading out” strategy in earlier years.
With recognition of the complicated and uncertain economic conditions home and
abroad and various relevant factors, we believe China should stick to its proactive
fiscal policy in 2010, although policy optimization is very necessary. It is very likely
that the eventual exit strategy will take the form of “fading out”, but it won’t happen
until endogenous dynamics such as private investment and household consumption
have grown strong enough to support stable and rapid economic growth.
Whether continuing now or exiting later, China’s fiscal policy, while serving overall
regulatory purposes together with the monetary policy, always focuses on facilitating
structural optimization, increasing effective supply, accelerating the transformation of
economic growth pattern and enhancing social harmony. This approach strikes a
balance between short-term regulation and medium and long-term optimization efforts
to promote sound and rapid development. Among all things, it is crucial to employ
economic levers (fiscal policy tools) and deepen reform to promote energy saving and
emission reduction, and to eliminate backward production capacity. In the post-crisis
era and in its modernization drive, China must establish a whole set of rules,
regulation and polices that meet the long-term needs of the market economy, prevent
local government financing risks and monitor fiscal deficit risks.
Of course, international coordination of fiscal policies is indispensable in the era of
globalization. As a responsible stakeholder, China will work closely with other major
economies in this regard.

(JIA Kang, Director and Research Fellow , Research Institute for Fiscal Science, Ministry of
Finance, P.R..China ;LIU Wei,Research Institute for Fiscal Science, Ministry of Finance,


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