China Needs More Active and Assertive Monetary and Fiscal Policy: Dong Ximiao

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One of China’s leading economists has called for the Chinese government to become more active on both the monetary and fiscal policy fronts, in order to deal with uncertainty in relation to debt problems in the property sector and the ongoing fallout from the COVID-19 pandemic.

“The next step should be for China’s monetary policy to be more active and assertive, and to stress forward leaning-exertion,” wrote Dong Ximiao (董希淼), chief economist with Merchants Union Finance and a researcher with the Fudan University Academy of Finance, in an opinion piece published by 21st Century Business Herald on 21 January.

“At present, the weighted average deposit reserve ratio of China’s financial institutions is 8.4%, and there is still considerable room for declines. There is also the possibility for policy rates and market rates to continue to decline.

“Of course, what’s more important is further clearing out monetary policy transmission mechanisms, expanding the positive incentives for financial institutions, enabling liquidity to enter the real economy in a more targeted and efficient manner, and transitioning from ‘loose money’ to ‘loose credit.’

“Financial institutions must engage in further innovation in products in services, and expand support and services for key areas and weak links in the national economy.”

Dong’s remarks arrived immediately following a reduction in China’s benchmark loan prime rates (LPR) that were announced on 20 January, for the second consecutive month of decline.

The 1-year LPR for January was 3.7%, for a decline of 10 basis points compared to the preceding month, while the 5-year LPR was 4.6%, for a decline of 5 basis point compared to December.

Dong Ximiao also called for more active fiscal policy from the Chinese central government.

“It must be stressed that monetary policy is not omnipotent, and stable growth and expansion of domestic demand also require coordinated exertion from fiscal policy,” wrote Dong.

“The next step should be for fiscal policy to be more active and vigorous – for example accelerating the issuance of local government bonds and expanding infrastructure investment.

“The government should continue to truly and properly implement measures such as tax cuts and fee reductions, reduce the burden for enterprises and individuals, and continue to stimulate the vitality of market actors.”