Yu Yongding: China’s Stimulus Shows the Problem of Success

Yu Yongding is an academician with Chinese Academy of Social Sciences and a former member of the monetary policy committee of the Chinese central bank. He writes on the Financial Times:

To maintain decent growth and avoid massive , the Chinese government was left with no option but to replace flagging external demand by domestic demand. But in the short run it is difficult to stimulate domestic consumption; investment demand became the only alternative. As a result of the stimulus package, the growth rate of fixed asset investment hit 36 per cent year-on-year in the first half of 2009, and China’s investment rate may have surpassed 50 per cent of .

The government knows very well that the economy has been suffering from overcapacity. This is why government-financed investment in the stimulus package is concentrated in , rather than new factories. However, there are still problems with an investment-centred expansionary fiscal policy. Due to the hasty and under-supervised implementation, waste in construction is ubiquitous, and the prospective returns of this big push into are less than promising.

More resources should be used in building a decent social safety network, so household consumption can play a more important role in driving economic growth. Government spending should be conducive to private investment and help the development of small and medium-sized enterprises, but many local governments are squeezing these businesses hard to compensate for falling tax revenues.


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