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China - Country economic memorandum : macroeconomic stability in a decentralized economy (English)

This report concludes that monetary accommodation of a rising consolidated government deficit (CGD) and of surges in local-government-led investment demand is the main cause of recurring inflationary pressure in the Chinese economy. Over the past five years, direct and indirect government borrowing from the central bank has on average financed more than two thirds of the CGD. Excessive devolution of decision-making authority to lower levels of government, along with insufficient enterprise and financial sector reform, has impaired the central government's control over the size of the CGD and over the conduct of monetary policy. For China to achieve its goal of a high and sustainable growth rate, it needs to reduce its dependence on the central bank for financing the consolidated deficit and contain the size of the deficit. This will require structural reform. First and foremost, the primacy of the central government in the area of macroeconomic management needs to be clearly and permanently established. Second, state-owned enterprises (SOEs) and state-owned banks need to become more autonomous. This report identifies five causes for the size of the CGD, and they are: 1) falling revenue-to-GDP ratio due to the absence of a national tax service; 2) dwindling share of central government revenue as a result of fiscal decentralization; 3) rising government investment expenditures; 4) heavy burden of subsidies to SOEs; and 5) poor budgetary coverage and procedures. Heavy reliance on central bank financing of the CGD has impaired the conduct of monetary policy in China. This study identifies two main causes of weakening monetary control: 1) monetary financing of the deficit; and 2) decline of the credit plan, more specifically, institutional weaknesses within the People's Bank of China (PBC) and poor and deteriorating interagency coordination on the formulation of macroeconomic policy. The study presents and examines the following recommendations: 1) raise the revenue-to-GDP ratio; 2) contain government investment expenditures; 3) control government current expenditures; 4) improve budgetary procedures; 5) assign roles to different levels of government; 6) strengthen PBC; 7) tighten regulatory control over non-Bank financial institutions; 8) improve control over PBC policy loans; 9) reduce PBC financing and redefine the role of government securities; 10) develop open-market operations and phase out the Credit Plan; 11) interest rate reform; and 12) improve coordination of macroeconomic policy.

Details

  • Document Date

    1994/10/26

  • Document Type

    Pre-2003 Economic or Sector Report

  • Report Number

    13399

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    China,

  • Region

    East Asia and Pacific,

  • Disclosure Date

    2010/07/01

  • Doc Name

    China - Country economic memorandum : macroeconomic stability in a decentralized economy

  • Keywords

    state bank;general agreement on trade and tariff;monetary policy;Agricultural Development Bank of China;government deficit;market for government security;negative real interest rate;Communist Party of China;income velocity of money;Agricultural Bank of China;positive real interest rates;structure of interest rates;assignment of expenditure responsibility;fixed investment;government investment expenditure;financial sector reform;share of revenue;public investment program;preferential interest rate;working capital;international capital market;personal income tax;national tax service;enterprise income tax;intergovernmental fiscal relation;nonbank financial institution;central government revenue;system of credit;interest rate policy;real estate tax;socialist market economy;hard budget constraint;allocation of credit;national public investment;interest rate flexibility;kind of investment;local government autonomy;reform of interest;interest rate adjustment;proposals for reform;scheme will;central government debt;monetary policy instrument;sustainable growth rate;commercial banking law;control over resources;divestiture of state;local government expenditure;foreign exchange market;short-term treasury bill;degree of autonomy;central government finance;allocation of fund;state planning commission;revenue sharing system;gdp growth rate;foreign direct investment;asset and liability;government current expenditure;net domestic assets;fixed capital investment;special economic zone;development research center;interest rate subsidy;balance of payment;tight monetary stance;payment of wage;burden of expenditures;local government borrowing;interbank market;budget deficit;Macroeconomic Policy;extrabudgetary fund;interagency coordination;Macroeconomic Management;budgetary revenue;inflationary pressure;Fiscal Reform;reserve money;open-market operation;financial system;macroeconomic reform;social burden;aggregate demand;financial program;Exchange Rates;tax structure;tax system;investment planning;

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Citation

China - Country economic memorandum : macroeconomic stability in a decentralized economy (English). Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/868701468771843991/China-Country-economic-memorandum-macroeconomic-stability-in-a-decentralized-economy