Macroeconomic Policies of China: A Brief Evaluation

Economic policies can be defined as multi-dimensional government decisions related to the country’s economic well-being. It covers the frameworks for setting levels of taxation, managing the cash supply, deciding the premium rates and numerous other types of economic strategies in which the government intermediates. These economic policies are of two types like Macroeconomic Policy and Microeconomic Policy (Mankiw, 2004).

Macroeconomic Policy mainly deals with GDP, unemployment rates, and price indexes to understand how healthy the whole economy is. National income, savings, consumption, unemployment, investment and inflation – these are the key issues that are discussed in the Macroeconomic policy (Ding, 1990). China, as a global economic giant, also implements different macroeconomic policies. Some of those are implemented by the People’s Bank of China – the Chinese central bank (i.e. monetary policy) and some are implemented by the Chinese government (i.e. Fiscal policy). Throughout the article, some of those significant macroeconomic policies are thoroughly discussed and evaluated.

Chinese Macroeconomic policies: At a glance

1. Macroeconomic policy for the housing industry

One of the major macroeconomic policies taken by the Chinese government is to raise the demand for the housing industry as well as to ensure a sustainable growth for the housing sector. This housing credit policy was taken on October 2014 with the possibility of Chinese real estate market downfall (Chinausfocus.com, 2014).

China has been suffering from falling price in its property market in recent times. As a key indicator for the economy, this is very important for the government to make the market sustainable. Following this policy, the Chinese government has planned to buy the unsold apartments and announce those as social housing. But the policy is not expected to result in an overnight success and despite the predicted fall of property price in the short run, the government hopes that this policy will support the economy in the long run.

Even though the crisis was flagrant in recent time, the root to the problem can be traced back decades earlier. In 1998, when China was experiencing a GDP growth of 4%, its real estate sector was expanding at a rate of 14%. This chronic overinvestment caused the downward spiral of Chinese housing industry.

2. The fiscal policy

The fiscal policy maintained in China is almost the same like that of other countries with a slight difference that Chinese central government has more command over the money supply and it can manage to mobilize a huge amount of fund very quickly. On the other hand, the huge fiscal imbalance is another important characteristic of Chinese fiscal policy. A huge gap exists between the income and expenditure of central and local government of China. The central government earns almost 50% of the income whereas account for only 20% of the expenses which gives the central government a greater control over the regional government (Treasury.gov.au, 2015).

3. Monetary policy

The monetary policy in china is designed to maintain a well regulated financial sector as well as to deal with a relatively inflexible exchange rate. The scenario for the banking sector is a bit changed here in china as the whole banking sector is dominated by a few state-owned banks. Interest rates are yet not to be determined by the market factors rather government fixes a rate to maintain a balanced profit. Again banks are not allowed to lend as much as they wish, they all are constrained by the government regulations (Treasury.gov.au, 2015).

4. Government Expenditure

Another macroeconomic policy on which private entrepreneurs are putting much emphasize is the government expenditure. China is one of those countries that come to the global focus for maintaining heavy government expenditure to nurture its highly bureaucratic administration. Under the present scenario, private entrepreneurs want the government to cut its heavy expenditure and use that fund to improve the living standard of the Chinese citizens. Private entrepreneurs also want the government fund to be used more and more for real economic development. They mention such governmental facility as a key supportive factor for China’s thriving economy. Furthermore, private entrepreneurs suggest the central government to focus more on location like “rim of the Bohai Sea”, “Hebei provinces” and “Liaoning provinces” with a population of 250 million which can have a huge contribution for the Chinese economy (Chinadaily.com.cn, 2015). Such recommendations from private entrepreneurs have certainly affected the fiscal and monetary policies of the Chinese government for past couple of years which is evident from the ongoing policies leading the economy towards liberalization.

5. Proactive fiscal policy

From 2011, the Chinese government has been following a proactive fiscal policy and sticking to its decision to continue this Macroeconomic Policy in future. Chinese officials mention this policy to be highly effective for sustainable growth, economic structure adjustments and the overall benefits of Chinese citizens. Under this policy, China seeks to tighten its control over financial risks in a certain sector like tourism, real estate sector and most importantly financial market which the Chinese government thinks will help China to gain sustainable economic development.

The mechanism of proactive fiscal policy lies within its demand creating feature that supports the economy by expanding domestic demand and the prudent monetary policy which is expected to keep the price stable (Chinadaily.com.cn, 2015).

6. Expansionary fiscal policy and tight monetary policy

In recent time, China has also been perusing through a new Macroeconomic strategy – the expansionary fiscal policy and tight monetary policy. The imbalanced macroeconomy is marked as the cause for the policy to be exercised. The Chinese economy is suffering from inflation and slower GDP growth as labor prices are marked to be increasing in China these days. Under such circumstances, China is becoming a less attractive place to start business operation compared to the locations like Vietnam, Thailand and Malaysia. As a response to the condition, the Chinese government implemented a series of policy different from those North American and European countries.

But the prerequisite for the policy to serve its purpose can be categorized as below:

This Macroeconomic Policy is essentially a combination of proactive fiscal policy and prudent monetary policy.

Two of the key characteristics of this policy are listed below-

1. While adjusting the policy, policymakers change the direction of monetary policy – at the same time keeping the expansionary fiscal policy static.
2. Compared to the rest of the world, China’s monetary policies changed rapidly in the past few decades and this is quite unique for a country like China.

 

From the above discussion, it can be deduced that the Chinese economy is not beyond the effects of the global financial crisis and the Chinese government is pursuing through various macroeconomic policies to strengthen its economy. Also, the government is essentially following both of the remedies stated above for keeping the pace of the economy sustained. For instance, one of the most afflicted industries in China was the housing industry for which the Chinese government has been following the second measure from above – changing the whole structure. Though the sector seems to be performing better, it will still take time to recover fully. So, it can be said that the macroeconomic policies taken by the Chinese government are more or less successful as the country is retaining its impressive growth throughout the last couple of years.

 

References

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