Cover story, issue no. 342, November 19th 2007
Translated by Lam Li
Original Article: [Chinese]

The call for giving priority to fiscal rather than monetary policy in China is gathering momentum as economists anticipate a slower growth for the country in coming years.

Although the Chinese economy has experienced years of high growth rates, concerns are growing over excess liquidity, a bubbling stock market, overheating real estate prices, and climbing inflation.

Debate on what policy would best curb the threats is fierce among market watchers and academics, with some supporters of monetary policy – which has become the mainstay of China's macro-economy toolkit in recent years – now turning their favor to a fiscal approach.

One of them is Standard Chartered senior China economist Stephen Green, who in his recent Asia Focus report projected a slower growth for China after mid-2008, adding that fiscal policy would become more prominent.

Of late, Green – who is held as an expert in monetary policy analysis – has been busy meeting and exchanging views with government officials, academics and journalists focusing on the fiscal approach.

He justifies his recent change of direction by saying: "The fiscal side has not been important for growth, which is what we normally focus on as bank economists. Going forward, once the economy slows and other liabilities (like pensions) show up more clearly in the system, the government's fiscal situation will become more important."

He adds, "If the economy slows, naturally, or via tighter monetary and foreign currency policy, then more stimulative fiscal policy could support growth."

To Green, the big questions though are whether fiscal spending can really be increased significantly for education and healthcare, and if such spending could support near-term growth.

Another economist who has called for better fiscal policy is Yu Yongding, director of International Economy and Politics Research Center under the Chinese Academy of Social Sciences.

Yu has written extensively on the importance of fiscal plans in supplementing monetary policy to curb a bubble economy and to alleviate the pressure of currency appreciation.