Senior Policy Figures Argue over China’s Fiscal Stimulus

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Some of the most influential figures in China’s economics policy sphere are engaging in public argument over the proper extent and nature of ongoing fiscal stimulus.

Xu Zhong, the head of the Chinese central bank’s research department, has made the rare move of publicly criticising the country’s fiscal policy, triggering open debate amongst senior officials from different authorities.

In a speech delivered last Friday Xu called for China to launch stronger fiscal policy in order to compensate for the economic impacts of its ongoing deleveraging campaign.

According to Xu China’s current fiscal policy settings are failing to fulfil their proper “countercyclical function” of boosting growth, while budget policies lack transparency and are difficult to understand.

“There is ample room for fiscal policy, but evidence shows that the policy is not being implemented actively enough,” said Xu.

A figure from the China’s Ministry of Finance has expressed public disagreement with Xu’s opinion, in a pseudonymous response carried by leading financial news provider¬†Caixin.

“Regardless of the budget deficit figures, fiscal departments have expanded active fiscal policies through various measures in practice,” wrote the official under the pseudonym Qingchi.

“Authorities have taken various measures to increase the activeness of the current fiscal policy, so even though the deficit budget is tighter compared with last year, it will still be effective.”

Xu Zhong also criticised rules instituted by MOF that let China’s local governments off the hook for the debt of state-owned enterprises and local government financing vehicles.

“Such moves may lead to moral hazard, reducing the willingness of local authorities to pay off debt which could pass fiscal risk to the financial sector, give rise to bad loans and even trigger systemic risks,” said Xu.

Qingchi instead argued that local financial institutions are not the “victims” of regional debt issues, but instead serve as “accomplices” who collude with local governments, or even hoodwink them.

The pseudonymous official pointed out that the complexity of operations by local SOE’s or financing platforms often “exceeds the capability of local government departments…some financial institutions are so powerful that they force local governments to offer loan guarantees and violate rules.”

Liu Shangxi, head of the Chinese Academy of Fiscal Sciences under the finance ministry, said on Wednesday that China should use fiscal policy to drive structural changes, as opposed to vigorously stimulate economic growth.

“The current proactive fiscal policy, which differs from conventional expansionary policy, is not a direct government effort to expand demand, but indirect effort by means of stimulating market vitality, optimising resource allocation and expanding quality supply,” said Liu in an opinion piece published by the state-owned Economic Information Daily.

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