With deflation continuing to nag China's economy, a proactive fiscal policy remains necessary this year.
However, we must see to it that flexible strategies be implemented so that limited fiscal spending may be used to drive up demand.
Despite its significant boost to the economy, continuing the proactive policy has worsened the deficit and will aggravate the burden of the revenue in coming years. Moreover, it may trigger inflation.
Under this circumstance, flexible strategies should be mapped out to make full use of State input to invigorate the economy.
Currently, governmental investment is the main force in boosting effective demand, while social investment remains stagnant.
The increased demand until now mainly came from governmental input in fixed assets. Except in well-developed coastal areas, there has been no significant increase in social investment.
The stagnation of social investment comes from the lack of investment channels to accommodate them.
The financial, insurance and telecommunications sectors, for example, have not been accessible to social investment until now.
China may possibly enter the World Trade Organization (WTO), which demands opening these sectors to foreign investors. It is unreasonable, to block domestic investors from entering the market.
And the introduction of social investment can spare State input to carry out some projects and give more vitality to the economy.
It is very difficult, however, for private enterprises to finance. They lack guarantees for their loans if they turn to the banks for help. The State should allow private capital to establish investment insurance companies especially for social investment. This not only spares capital for State revenue, but also is conducive to expanding social investment and boosting the overall economy.
To activate the economy, investing in manufacturing projects can be a good choice.
When governmental investment is used to increase market demand, it will have a great bearing on the results of investment. It is necessary to invest in infrastructure, which lay foundations for sustainable development of the economy. Compared with the manufacturing industry, however, it is less powerful in driving up the economy because the manufacturing industry is interrelated more closely with other industries.
A rational industrial combination, should be made to receive the State investment. Apart from key infrastructure projects, some manufacturing projects should be given priority in receiving governmental investments.
Fiscal payment for discounted interest, especially in real estate, should also be encouraged, to make full use of the limited finances.
Discounted interest can bring along more investment and market demand. For example, a 9 billion yuan (US$1.1 billion) Treasury bond issued in 1999 that was used to pay for loan interest of corporate technical upgrading could generate an 180 billion yuan (US$21.7 billion) investment from loans and auxiliary corporate investment. It not only produces direct investment demand, but also will inject vitality to the economy in the long run.
Fiscal payment for discount interest will not get direct benefit from the projects it assists. It aims to bring along capital from banks and corporations involved, which would manifest better results than using them as direct investment.
The range of fiscal discount interest should be extended to more industries with high inter-relativity, such as the real estate sector.
Currently, there is a strong demand for housing. But due to limitations of excessive price and relatively meager incomes, common people cannot translate their demand into real consumption. Here, discount interest could be granted to homebuyers to jazz up the stagnant real estate market and other related industries.
When implementing proactive fiscal policies, income policy, such as abolition of certain taxes and fees, can be employed.
In the real estate sector, for example, the high prices of housing has dampened people's house-buying desire.
But calculation indicates that 55 percent of the price has been taken up by various taxes and fees, including the investment orientation adjustment tax. If some of the fees and taxes can be abolished or reduced, the price would go down considerably. Then with the support of fiscal discounted interest and housing loans, the real estate sector will certainly prosper. And the State revenue will gain more from the thriving real estate market than what it has lost in its payment for discounted interest and the reduction of taxes and fees.
To drive up the economy, the role of local governments should not be ignored.
Funds raised by the local governments can effectively subsidize the central government in activating local economies.
But according to the Budget Law, local governments can not issue treasury bonds without permission of laws or the State Council.
The State Council, therefore, could allow those credit-worthy local governments to raise funds to stem economic stagnation, under the condition that the central government exert strict control and supervision on the usage of the treasury bonds.
The author is deputy director of the Economic Commission of the Chinese People's Political Consultative Conference.
(China Daily April 3, 2000)
