Macroeconomic Policy in China Economic Growth

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Macroeconomic Policy in China Economic Growth

The major finance comes from borrowing, in three ways. First, domestic loans, that is loans of various forms borrowed by investing units from banks and non-bank financial institutions. Second, “raised” funds, that is extra-budgetary funds for investment in fixed assets received by investing units from central government ministries, local governments, enterprises and institutions. And third, “other funds”, that is funds for investment in fixed assets received from other sources, including capital raised through issuing bonds by enterprises or financial institutions, funds raised from individuals, and funds transferred from other units.

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Clearly then it is the flexibility to acquire funds that enables different entities to undertake such investment expenditures that raises the investment income ratio and keeps growth going at high levels. Credit to finance such expenditures has indeed been easily available because the transition from a controlled to a more decentralised monetary system has implied a relatively lax monetary policy. This has resulted in a situation where local government functionaries, who influence appointment of banking and other functionaries at the local level are able to easily access funds for their projects
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The problem confronting the Chinese government is to deal with the inflation that results in such circumstances of “overheating”. What the government can try and do is engineer an increase in (administered) interest rates. But, there is no evidence that the kind of investment expenditure being spoken of is interest rate sensitive. Further, increases in interest rates could create a host of problems. In the first instance they can, just as a possible revaluation of the yuan, result in a spurt in capital inflows into the economy, worsening the exchange rate management problem. Second, they would adversely affect the viability of the already weakened state-owned enterprises, default by whom would worsen the non-performing assets problem of the banks.

All this results in a situation where the Chinese government falls back on administrative measures, including the use of central “commands” and guidelines to hold back runaway rates of investment. So despite the overt emphasis on markets and capitalistic growth, Chinese macro policy remains still very reliant on the use of administrative measures which serve to dampen economic cycles.