The View | Why China can’t afford to tighten economic policy just yet
- China’s growth in 2020 was driven by fixed-asset investment and exports. This is not ideal
- To achieve higher growth in 2021, China needs a larger increase in infrastructure investment, and the government may have to issue more bonds than planned
According to the Ministry of Finance, general budget revenues will increase by 8.1 per cent this year, while general budget expenditure will grow by just 1.8 per cent. It is rare for government spending to grow so much more slowly than budget revenues.
And although the government’s planned issuance in 2021 of 7.2 trillion yuan (US$1.1 trillion) in bonds is still high, it is materially smaller than the 8.5 trillion yuan it issued last year. At the same time, the People’s Bank of China is likely to maintain its monetary policy stance, if not tighten it.
The Chinese government’s cautious attitude towards expansionary macroeconomic policy reflects its vigilance regarding inflation and financial risks – especially the latter. Though inflation may worsen somewhat in the near future, it is unlikely to be economically destabilising.
While China should pay great attention to the problem of high leverage ratios, its financial vulnerability has been exaggerated. It is difficult to imagine how a high-saving, high-growth economy, with huge state-owned assets at its disposal and limited foreign debt, can be brought down by a systemic financial crisis resulting from high leverage ratios.
