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UPDATED: September 26, 2010 NO. 39 SEPTEMBER 30, 2010
Observer: How to Make an Exit

BUILDING BOOM: The coastal railway in Guangxi Zhuang Autonomous Region has been revamped to support more traffic. An infrastructure construction boom boosted by the 4-trillion-yuan ($586-billion) stimulus package has helped the Chinese economy realize a swift rebound (LU BOAN)

At the Annual Meeting of the New Champions 2010 held by the World Economic Forum, also known as the Summer Davos, Chinese economists and officials held heated discussions on whether China should apply an exit strategy on its economic stimulus measures and when would be the proper time to do so. This year's meeting was held on September 13 -15 in north China's Tianjin Municipality. Beijing Review reporter Liu Yunyun covered the events. Edited excerpts from attendants' remarks follow:

Zhu Min, special adviser to the International Monetary Fund and former Vice Governor of the People's Bank of China:

China will continue its current economic policies, while our fiscal and monetary policies will remain relatively loose.

The major task for the Chinese Government now is to shift its economy from relying on exports to relying on domestic consumption. Meanwhile, a stable Chinese currency will be conducive to world economic stability.

China will realize an 8-9 percent economic growth this year. What we are now concerned about is economic restructuring and the quality of economic development and but not just with a focus on speed.

Globally, we need the G20 to lead financial reform efforts and to form global supervision cooperation. We must cooperate with each other to make joint financial decisions.

Jia Kang, Director of the Research Institute of Fiscal Science of the Ministry of Finance:

The government will consider whether to continue its fiscal stimulus policy based on the macro-economic performance in the first nine months of this year. But right now, there's no definite answer.

August economic figures suggested the Chinese economy is still recovering, shaking the widely accepted belief that the economy is back to normal.

The 200 billion yuan ($29 billion) in local government bonds, which have been distributed each year for the past two years, should still be distributed next year.

To cope with the financial crisis, the Central Government, on behalf of the local governments, issued three-year local government bonds worth 200 billion yuan in 2009 and 2010.

The Central Government's distribution of local bonds is more transparent and standard than at the local level, and it will be easier to manage the risks since local governments are reluctant to admit to problems.

Past experience shows it will take the country several years to go through the circle of bust and boom. The timing of stimulus exit depends on when the companies can maintain stable operation without expansionary fiscal and credit support. Judging by the current macro- and micro-economic figures, now is not the right time to stop expansionary fiscal policy.

When the economic indexes return to pre-crisis levels, the government should still be careful of choosing the timing to apply an exit strategy. In my opinion, the government should diversify its treatment of different industries. For instance, its stimulus for traditional industries with high-energy consumption and environmental pollution should gradually phase out until restrictive measures are taken. As for new and emerging industries which are good for industrial optimization, the government should not only continue the stimulus measures but also give more capital and policy support to those industries so that they might grow bigger and stronger in the post-crisis era.

Ba Shusong, Deputy Director of the Institute of Financial Studies of the Development Research Center of the State Council:

As for economic trends, the Chinese economy will go through a correction period from the second half of this year until the first half of next. This year's first-quarter GDP growth of 11.9 percent is a peak of post-crisis recovery and will go down from the second quarter till the first half of 2011. I think domestic GDP growth will stay at around 9 percent in the third quarter and about 8 percent in the next three quarters.

Against the backdrop of a slowdown of economic recovery, consumer prices are unlikely to go up.

Consequently, it is unlikely that the central bank will raise interest rates.

The growth of money supply is falling back. If the government does not take any major or new stimulus policies, the credit growth will stop ballooning and return to normal in 2011. The weakening global economic recovery will force major economies to stick to low interest rates for a relatively long period of time. They will maintain the interest rate at a low level of about 1 percent for the next two to four years. The international economic situation is squeezing China's space for interest rate hikes.

Li Daokui, member of the Monetary Policy Committee of the People's Bank of China and a professor at School of Economics and Management of Tsinghua University:

I suggest the government readjust the deposit interest rate to curb inflation expectations. The consumer price index is expected to grow 2.9 percent in 2010, and the growth rate will go down after reaching a peak at the end of the third quarter this year.

But I really can't say when the government should increase the loan interest rate. It all depends on macroeconomic conditions.

Long Yongtu, Secretary General of the Tianjin-based G20 Research Center and former Secretary General of the Boao Forum for Asia:

China no longer needs more stimulus measures. The 4-trillion-yuan ($586-billion) stimulus measures are more than enough to guarantee double-digit growth. If more stimulus measures are taken, problems might emerge in the Chinese economy.

Many people are counting on domestic consumption to replace exports to be the primary engine for economic growth. But it takes time to realize this target as the urbanization rate has not matured enough. Therefore, it is unreasonable to cut the tax rebate for some labor-intensive products to zero. As far as I'm concerned, the government should not suppress exports at all.

Xia Bin, member of the Monetary Policy Committee of the People's Bank of China and Director General of the Financial Research Institute of the Development Research Center of the State Council:

After the stimulus measures were taken, the Chinese economy has been recovering at a much faster rate than other countries. But at the same time, problems have arisen due to excess money and credit supply. Asset bubbles, price bubbles and excess production capacity have been growing.

The Chinese Government has realized the importance of transforming the economic growth pattern, but it won't be easy. The next important task for the government is to carry out reforms in various aspects to upgrade the industrial structure.

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