My Macroeconomic Policies for Current China Economy


My Macroeconomic Policies for Current China Economy

Ricardo Li, the president of ServiChina.cn

 

Stilly, I think traditional incentives can increase high productivity growth, such as: first, stimulating research &development; second, increasing risk taking by firms and investors; last, accelerating adoption of new science and technology.

 

When facing the huge economic and financial criese, we should take consumption as our current ultimate goal, change anothet word, the goal of macroeconomic policy should be a faster rise of consumption, not just of output.

 

So here I concluded my main three specific goals for China economic growth, as follows:

l        To increase consumption faster than GDP, which including 1) reduce excessive saving and investment; 2) consume more of GDP instead of exporting it;

l        To increase non-agricultural employment, it means that raise ratio of employment to GDP;

l        To increase consumption of disadvantaged sectors, for construct harmony society and harmonious growth of CPC.

 

For achieve these new economic goals, which instruments we should use?

l        Tax reform and then use new tax rules to reduce corporate saving and stimulate household consumption, the detail as follows:

1) tax retained earnings of private firms more heavily than dividends to encourage greater payout; 2) mandate that SOE surpluses be paid out instead of being saved; 3) subsidize some forms of consumption now(-VAT ), with subsidies to be gradually removed, it also means that the expectation of rising prices will encourage more current domestic consumption; 4) gradually substitute higher VAT for payroll tax, it means that the expectation of rising prices will encourage more current domestic consumption; 5) besides these above mentioned, meanwhile we should strengthen confidence in social security retirement system, it so called expand the number of provices where social security benefits are fully funded; 6) develop deeply Chinese health insurance market to reduce need for individuals to accumulate funds.

l        Allow a relative greater fiscal deficits between transition period and the higher consumptional period, the detail as follows:

1)      I think multiyear increase in the budget deficits would not be a problem for China economy; 2) in generally, budget deficits are a problem in countries where: financing the deficit causes inflation and national saving rate is low. Actually neither of these two conditions holds for China economy; in fact, China can use the budget deficits to 3) provide subsidies to health insurance; 4) fund social security accounts; 5) lower VAT rates temporarily; 6) subsidize health and education spending in rural areas; 7) the last, all these above mentioned will increase more labor intensive activities.

l        Increased government financing to subsidize priority consumption, such as health, education, etc. which can increase these forms of consumption. The detail as follows:

1)      these policies are already part of budget but spending amounts are very low; 2) health and education services provide more jobs per RMB of spending than the production of manufactured products, which means that there is no fixed ratio of jobs to GDP, China can increase employment with slower GDP growth by increasing producting of services; the last, the government can subsidize consumption of privately produced health and education.