Beijing should resist pressure to turn on the fiscal tap

PUBLISHED : Sunday, 20 July, 2014, 4:13am
UPDATED : Sunday, 20 July, 2014, 4:15am

The mainland economy's second-quarter performance restored growth to the policy target of 7.5 per cent, from an 18-month low of 7.4 per cent the previous quarter. This confounded market expectations and bears out Premier Li Keqiang's statement that the economy was doing better in the second quarter. Recent, targeted mini-stimulus measures apparently stabilised growth and offset the drag of a weak property market. But economists were quick to characterise it as short-term relief from pain rather than long-term gain, with the risk that cooling housing starts or export weakness could drive renewed growth deceleration.

This sets the stage for the annual conclave of current and retired senior Communist Party officials in the beach resort of Beidaihe , which establishes the tone for important political and economic policy issues.

The secret discussions this year are bound to include vigorous about debate whether the government should deliver more fiscal and monetary stimulus.

Jitters at home and abroad about the dangers of slowing growth in the world's second biggest economy have just been exacerbated by official data for new home prices last month. They showed that a record of nearly 80 per cent of the 70 major cities monitored by the National Bureau of Statistics suffered a month-on-month decline, with no sign prices have bottomed out. The pro-stimulus lobby will cite this data to bolster its case.

It is not convincing. President Xi Jinping and Li deserve credit for having resisted tremendous pressure to take their foot off the monetary and fiscal brakes. The desired rebound was achieved with more flexible stimulatory packages, targeted, for example, at railways infrastructure and affordable housing through rebuilding city slums.

Now is not the time to loosen monetary policy and turn on the fiscal tap. It is more important to push on with a rebalancing of the economy towards domestic consumption and away from reliance on investment and excessive debt.

As it is, reform could stall when it has barely begun, for a number of reasons. One is Xi's crackdown on corruption, which is blamed for the inaction of officials accustomed to the incentives of rewards from kickbacks and rent seekers. The priority now is to contain corruption while pushing through reforms to make government more transparent and publicly accountable.