I. China's Current Fiscal Policies

Since the beginning of 1998, the Chinese Government has implemented pro-active fiscal policies in response to the challenges of the Asian financial crisis, economic restructuring and the disastrous floods rarely paralleled in history. These policies will continue in 1999.

a) Background of pro-active fiscal policies in 1998

In 1998, China's economy was faced with an unprecedentedly formidable and complicated domestic environment. Affected by Asian financial crisis, China's export encountered increasing difficulties with its contribution to the growth noticeably reduced. The vanishing shortage economy and the emergence of the buyer’s market to replace the seller’s market for most manufactured goods as a result of the rapid growth over the past two decades give rise to new challenges. The conventional consumer goods have lost much of their glamour and the demand for new ones has yet to come. Consumer prices remain low, and thus people skew toward saving more than usual, and demand constraint on market clearly intensifies. As the reform deepens, the deep-seated problems long compressed in the economy, such as the irrational investment structure, excessive duplication of capacities and low-quality growth, are becoming more acute. Some state-owned enterprises, pending a fundamental shift of their modus operandi, are not adequately responsive to the changing market both at home and abroad. Consequently, their performance slumps, incurring increasing unemployment pressure.

Against this background, the Chinese Government made a resolute decision to implement pro-active fiscal policies on the basis of a thorough analysis of the international and domestic economic situation and trade-off of advantages against disadvantages. These policies are aimed at expanding domestic demand, tapping external and domestic markets and maintaining a stable exchange rate. They are also meant to play a more direct and effective role in gearing up growth and optimizing economic structure through the expansion of public expenditures. This decision to increase public expenditures through additional issuance of treasury bonds is made out of the following considerations:

1. The introduction of pro-active fiscal policies during deflationary period could provide an effective and immediate impetus to the growth of economy. The increase of fiscal expenditures through additional issuance of treasury bonds can stimulate demand directly and also indirectly by increasing wages and profits, encouraging individual consumption and enterprise investment and invigorating related sectors. The increased fiscal expenditures usually produce a multiplying effect on demand than is otherwise the case. Apart from increasing direct investment and stimulating domestic demand, the additional issuance of treasury bonds can pave the way for increased bank lending through supplementing and increasing more equity funds for construction projects.

2. China’s infrastructure as a whole is still underdeveloped, particularly in terms of water conservancy, roads and railway, telecommunication, urban infrastructures, urban and rural power transmission, flood control in major rivers, and ecological and environmental protection. The inadequate infrastructure cannot meet the needs of further developing the national economy and improving people’s livelihood and is, therefore, in urgent need of more investment. Enhancing infrastructure will not only stimulate domestic demand effectively, therefore pulling up growth swiftly, but also help avoid excessive capacity in processing industries, promote economic restructuring and maintain a steady and long-term growth.

3 The commercial banks, under stronger financial disciplines, have become increasingly prudent in lending to projects in processing industries. As their loanable funds build up, waiting for viable business, their operating costs have increased. In this connection, issuing treasury bonds to commercial banks will help improve their operations, mitigate financial risks and coordinate monetary and fiscal policies.

b) Main features of the pro-active fiscal policies of 1998

China’s pro-active fiscal policies in 1998 were aimed to achieve a set of goals, including stimulating growth, reducing regional disparities, maintaining social stability, enhancing people’s confidence and improving export competitiveness. The main contents of the policies can be summarized as follows:

First, placing an additional RMB yuan 100 billion of treasury bonds with commercial banks earmarked for infrastructures with a view to expanding domestic demand and stimulating growth.

Second, investing the proceeds from issuing RMB yuan 270 billion special treasury bonds as equity in four major state-owned commercial banks to raise their capital adequacy ratios to 8%, as required by the Basel Agreement and China’s Commercial Bank Law, thereby further strengthening their risk-prevention capacity.

Third, increasing the central government spending by RMB yuan 18 billion to further deepen SOE reforms and support the flood fighting and rehabilitation efforts. The funds are used mainly for paying in full the minimum living expense to SOE laid-offs and pension to retirees, and for supporting the flood control and disaster relief.

Fourth, to boost China’s exports, attract more foreign investment and maintain a sound balance-of-payments position, the Chinese government has in succession raised the export tax rebates for textiles, coal, cement, steel and some machinery and electronic products. At the same time, the Chinese government adjusted the tax policies regarding equipment imports by reducing or exempting tariff and VAT for those foreign and domestic invested projects encouraged by the national policies.

c) The pro-active fiscal policies for 1999

The internal and external economic situations in 1999 leave no room for optimism. On the external side, some countries and regions affected by the Asian financial crisis have begun to show signs of recovery, yet the serious impact of the crisis is still biting and even aggravating. At the same time, uncertainty and volatility in world economy are also increasing. Affected by the Asian financial crisis, the growth rate of China’s exports this year is predicted to be low and even negative. On the internal side, fundamental solutions are yet to be worked out to such serious problems as mismatch between supply and demand in domestic and international markets, weakening demand, poor performance of SOEs, and low quality of growth. The negative implications of these problems for this year’s economic performance should not be underestimated.

Therefore, the Chinese Government will continue to pursue pro-active fiscal policies, which would necessarily increase the budgetary outlays to a certain extent.

In the medium to long term, China will maintain a moderately tightened fiscal stance, with a view to achieving a balanced budget over time. As a major developing country with a vast territory, huge population, weak infrastructure, yet tremendous market potentials, China will develop its national economy mainly through expanding domestic demand. While in short term, it is necessary to stimulate domestic demand by increasing public expenditure, the Chinese Government, in the long run, will need to establish instead a policy framework and institutional set-up to promote enterprise investment and private consumption.

II. Regulating User Charges and Fees: Priority of Fiscal Reform in 1999

Over recent years, there have been serious concerns about illegal fees and charges on economic activities and social services in China. These charges have only imposed a financial burden on enterprises and farmers with implications on social stability, but also undermined the Government’s macro-adjustment ability and fiscal distribution function. Therefore, the government has decided to speed up regulating fees and charges. In 1998, The government started to address this issue, eliminating some 727 items of illegal and unjustified fund and fee charges, thus reducing the financial burden on enterprises in 1998 by RMB yuan 37 billion.

The general approach to this reform is to take different measures in light of the nature and category of various funds and charges. The illegal and arbitrary funds and charges will continue to be dealt with and eliminated resolutely. The funds and charges that reflect the government functions and are tax by nature will be replaced by relevant taxes and incorporated in budget. Some charges that no longer reflect the government function will be converted into market-based fees and subject to taxation by law. A small number of fees that are consistent with international practice and need to be retained will continue to exist, but the collecting authorities shall remit the revenues to the government and their expenditures will be financed by the budget separately. Considering the serious problems of illegal charges on vehicles and tolls on roads, the government has decided to start with reform on the vehicle and road fees and charges. This reform will be a pilot in fees and charges regulation, which will be followed in due course by tax and fee management reform in rural areas.

In addition, the Chinese Government will adjust and regulate its tax policy on processing trade. The main measure is to levy import tax and offer export tax rebate for the processing trade, which at the present time does not pay import tax, nor enjoy export tax refund. At the same time, export rebate rate for general trade will be increased step by step on a selective basis, and the government will make a comprehensive review on preferential tax treatments that have already expired.