In the red
Mar 6th 2002
From The Economist Global Agenda


As China’s legislature, the National People’s Congress, holds its annual plenary
session in Beijing, the government can celebrate continued rapid economic
growth despite the global slowdown. But maintaining a breakneck pace of
expansion is putting a huge strain on the nation’s finances


ONCE again, Chinese leaders have set a high
target for their country’s economic growth.
But achieving it will be costly. In a report
submitted on Wednesday March 6th to the
country’s parliament, the National People’s
Congress, the country’s top economic planner,
Zeng Peiyan, called for 7% growth in 2002,
only slightly lower than last year despite the
global economic slowdown and weak demand
at home. Getting there will require yet another
year of massive government spending that will
push the budget deficit up to a record $37
billion.

For the past four years, China has been trying to buy its way out of trouble. The aim
has been to stave off worrying signs of deflation, by boosting demand and make up for
the slowing growth of China’s export sector. The result has been, on the one hand,
remarkable (though gradually diminishing) growth and, on the other, a fast-growing
budget deficit and rising government debt. Between 1998 and 2001, the government
issued bonds worth $62 billion.

At the parliament’s annual ten-day gathering,
which began this week, some of the nearly
2,900 delegates are likely to ask how long China
can afford to keep spending this way. In his
report at the opening session, China’s prime
minister Zhu Rongji argued defensively that the
ratio of national debt to GDP was “still within
safe limits”. He said there was “still room” for
issuing more long-term treasury bonds to
finance construction projects. According to
official figures, government debt amounted to
16.3% of GDP in 2001 and the budget deficit a
mere 2.7%. But these figures are misleading.

The government’s debt figures do not include
bonds issued by the state-owned
asset-management companies and bonds issued
by the state-owned “policy” banks. Nor do they
take into account non-performing loans in the
state banking system or pension liabilities—both
of which amount to colossal sums. Song
Guoqing, an economist at Beijing University,
said in a recent article that if China’s budget
deficit continued to increase, and bad loans
kept on piling up in the banks, “it won’t be
many years before China’s economy falls into a
deep, deep pit of debt and bad loans like
Japan’s”. The result he said “would be too
dreadful to contemplate”.

But China’s leadership appears even more
worried about what would happen if it
slackened its efforts to pump up the economy.
Many officials believe that 7% growth is the
minimum needed to create enough jobs to
prevent serious social unrest.

The planning minister’s report to parliament said
the unemployment rate would rise to about
4.5% this year, up from 3.6% in 2001. Again the real figures are substantially higher,
since the government does not include the rural unemployed or the large number of
urban workers who are in effect jobless but have not been formally laid off.

The government is facing widespread discontent—including sometimes violent
protests—in the countryside, where growth rates have been considerably lower than in
the cities. Last year, the net incomes of rural residents rose by 4.2%, less than half the
rate of increase of urban disposable incomes. Mr Zhu said farmers’ incomes in some
important grain-producing areas were actually decreasing. The aim is to achieve another
4% growth in rural incomes this year. But many farmers will still suffer. The livelihoods of
millions could be damaged when China opens it markets to cheaper agricultural imports
as required by the World Trade Organisation (WTO), which China joined in December.

Unless the rural economy picks up, it will be difficult to achieve sustained growth in
domestic demand. But reviving the countryside will cost money too. The biggest change
needed is a new simplified tax system to replace the practice of imposing a host of
arbitrary fees and levies on farmers. The government began experimenting with this in
some parts of China in 2000, but it has proved far more difficult than it expected.
Although it has resulted in farmers paying less to officials, rural governments have found
themselves starved of cash and hence unable to fund schools and clinics.

China’s finance minister, Xiang Huaicheng, told
parliament that the tax-for-fee reform would
be extended to one-third of China’s provinces
in 2002. He said the central government would
spend $1.8 billion on subsidising the effort. But
this will be far from enough. Some Chinese
economists believe that as much as $12 billion
will be needed each year to prevent rural
services from collapsing.

Finding such money will not be easy without
further expanding the deficit. Mr Xiang said
that central-government budget revenue
would grow by only 7.7% this year, compared
with 20.9% growth last year. Reasons for this include tariff cuts required by the WTO
and cuts in share-transaction taxes and business taxes for the banking and insurance
industries. Mr Xiang said the leadership was “paying close attention to some
long-standing, hidden financial risks” and trying to eliminate them. Progress is worryingly
slow.

Quelle: Economist.com

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