Saturday 20 December 2008

Provinces to Boost China’s 2009 Growth Rate

Count on China’s provincial governments to push through stimulus measures needed to hoist the economy’s growth rate to 8 per cent next year, says an influential Beijing academic.

1 comment:

Guanyu said...

Provinces to Boost China’s 2009 Growth Rate

By Grace Ng
20 December 2008

Count on China’s provincial governments to push through stimulus measures needed to hoist the economy’s growth rate to 8 per cent next year, says an influential Beijing academic.

This year, China’s slowing economy is on track to post over 9 per cent growth.

Professor Lin Shuanglin, who chairs the department of public finance at Peking University’s School of Economics, believes China’s four trillion yuan (S$845 billion) package - unveiled last month - will be enough to grow the economy by 8 per cent.

This is because local governments are motivated to deliver results.

‘I don’t think China’s growth is a problem...the local governments have strong incentives to increase output,’ he said after delivering the inaugural lecture of the East Asia Institute Public Lecture Series here on Thursday afternoon.

Beijing has a system of rewarding provincial governments with rebates on tax revenues if they exceed growth targets. Beijing currently collects 75 per cent of its revenue from value-added taxes (VAT) and the provinces keep the rest.

‘At the beginning of this year, the government had tried to cool down the (overheating) economy, and the local governments were not happy. The current system has strong incentives for local governments to raise growth,’ he noted.

Prof Lin, one of the public finance specialists consulted by Beijing on its stimulus measures, was answering a question about China’s economic growth forecast for next year, which ranges widely from 5 per cent to over 8 per cent.

His view of the role provincial governments play in the stimulus measures offered a fresh perspective on the forces keeping the world’s fourth-largest economy trundling along.

Experts in the West have largely pointed to the central government’s role in unleashing fiscal measures to perk up consumption and the property sector.

Even then, the four trillion yuan package ‘may not be enough’ to sustain growth above the 8 per cent rate that Beijing believes is needed to generate enough jobs for the population, noted Royal Bank of Scotland analyst Wendy Liu.

But Prof Lin chose to put the spotlight on provincial officials.

After all, they will raise half the cash for the package and implement measures to hit the 8 per cent mark.

The local governments are likely to match the central government’s new spending of about 1.2 trillion yuan over the next two years, noted Prof Lin.

The ‘multiplier effects’ - increased spending in one part of the economy sets off chain effects in other parts - of this 2.4 trillion yuan spending would bring the total up to four trillion yuan.

Within days of the announcement of the stimulus package last month, provincial governments rushed to draw up investment plans of 10 trillion yuan, according to China Central Television.

Prof Lin said the short-term stimulus measures follow the discipline of longer- term goals, aiming to improve health care and education in the provinces.

But one concern is how these provincial governments would fund them.

Many provincial governments have ballooning budget deficits, and have to rely heavily on bank loans and transfers from the central government.

One way to address this is to raise the local governments’ share of VAT revenues, suggested Prof Lin.

Another is to allow them to issue debt such as revenue bonds to build projects such as bridges and public utilities: ‘If local governments are permitted to issue bonds, China’s economic growth will quickly accelerate.’

Beijing is ‘currently considering this proposal’ and may do this soon, said Prof Lin, but cautioned that he does not represent the ‘official view’.

Other economists acknowledged that the provincial governments will influence the success of the stimulus package, but warned that they may also hinder it.

Merrill Lynch economist Ting Lu noted that that ‘local governments may not devote precious resources to actively participate in the housing stimulus plan’.

This may mean that ‘one of the major risks to China’s stimulus policy lies in the property sector’.

JPMorgan economist Frank Gong warned that a ‘spending spree’ may ‘result in rising corruption cases and wasteful spending in an environment of deteriorating global demand’.