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SCMP Reporter

Concerns have heightened over Beijing's expansionary fiscal policy, after an influential mainland think-tank warned that long-term pump-priming would lead to economic problems.

The warning, in a report by the China Academy of Social Sciences, came on the heels of Finance Minister Xiang Huaicheng's rare comments last week about his increasing discomfort with China's pump-priming.

Mr Xiang warned that China's expansionary fiscal policy, which led to record budget deficits and lifted the national debt to US$193 billion, or 16.7 per cent of gross domestic product, could not continue forever.

He cited a deterioration of the Government's balance sheet in the first quarter, which showed that spending rose 23.9 per cent year on year to 351 billion yuan (about HK$328 billion) while revenue grew just 3.4 per cent to 380.78 billion yuan.

Mr Xiang's comments indicated a fierce spending-policy debate within the Government.

Yesterday's warning by the academy came in the spring edition of its quarterly Analysis and Forecast of China's Economic Situation.

The academy said China should shift the focus of its expansionary fiscal policy from stimulating investment to job creation and raising farmers' income.

However, maintaining such high, long-term economic growth through an expansionary fiscal policy would visibly increase China's burdens and lead to other problems, the academy warned.

The problems are that investment is growing faster than China's GDP growth while consumption is not growing fast enough to keep pace with this growth as well as the rising disparity between rich and poor.

Between 1998 to the end of last year, China has issued 510 billion yuan of long-term treasury bonds to fund infrastructure projects and keep the mainland's economy growing.

During the years in question, China's active fiscal policy accounted for a 1.5 percentage point, two percentage point, 1.7 percentage point and 1.8 percentage point increase in GDP respectively, according to official figures.

This year, Beijing has earmarked another 150 billion yuan worth of long-term treasury bonds for construction purposes.

The issues were triggered by the Asian financial crisis which caused exports to fall sharply and the economy to grow at targeted levels.

The academy report says that expansionary policy-triggered fixed asset investment now accounted for almost 40 per cent of China's GDP, up from the more appropriate level of 30 per cent.

The ability to maintain the right balance between investment and consumption could not be underestimated, the academy said.

As fixed asset investment's share of GDP has grown, consumption has accounted for an increasingly smaller percentage of China's GDP.

The main reason for the decrease in consumption is because Chinese incomes are growing at a slower rate than the country's GDP growth.

Another factor is that the gap between China's rich and poor is growing wider.

China's Gini index, which measures income inequality, is already near the internationally recognised 0.4 warning line.

Although China's pro-active fiscal policy has helped economic growth in the cities, it has been less helpful in rural areas because little of the money raised from issuing treasury bonds is invested into these areas.

On the one hand, the problem is that China has been forced to take a pro-active fiscal policy due to the economic environment domestically and abroad, according to the report.



Warning on excessive pump-priming