[By Zhai Haijun/China.org.cn]

Premier Wen Jiabao called to "give more priority to maintaining growth" during an inspection tour of Wuhan, capital city of central China's Hubei Province on May 18-20. This is the second time Premier Wen has talked about the subject after he first mentioned it at the annual session of the National People's Congress, China's top legislative body, in March.

It's necessary and a must for Wen to emphasize maintaining growth as China's economy faces a slowdown. Electricity generation only grew 0.7 percent from the same period of last year in April, the slowest growth in 16 consecutive months. Actual utilized foreign capital has also experienced negative growth for six consecutive months. The new loan growth has plummeted to the bottom of the year and savings kept losing over the past month. By the end of April, the growth rate of money supply (M1) balance has been at a record low since 2005.

But how to support growth and which path to choose are worth thinking deeply about.

Normally, choosing an expansionary fiscal and monetary policy will bring a short-term effect on stimulating the economic growth. But it does not fit the current situation in China.

First, "investment drive" could produce a "growth myth" before due to China's backward infrastructure construction. China previously needed large scale investment in this field. But now, this premise has vanished because infrastructure construction in China is almost complete and its efficiency has continued falling over the years.

Second, China's broad money supply (M2) has been growing at an annual rate of 18 percent in recent years. Previously, excessively issued currency had been consumed by the commercialization of goods and services in the marketization of state owned enterprises, housing, education, and medical care since the reform and opening-up. However, at present, an indication of over marketization has appeared in these fields. It's time to return to protecting people's livelihoods.

In fact, the premise of implementing an expansionary fiscal and monetary policy to stimulate the economic growth has no longer existed. On the contrary, this policy will plant a mid- and long-term latent danger for the economy. In 2008, by reacting to the challenge of the global financial crisis, the central bank lowered the reserve requirement ratio by 2 percent in the last three months of 2008 and reduced the interest rate by 1.89 percent after a four-time-cut. Meanwhile, the M2 balance has increased by 53 percent within a year. Moreover, the central government brought out a stimulus package with 4 trillion yuan and the local government raised almost 20 trillion yuan for investment. Therefore, China has kept an annual growth rate of over 9 percent since 2009.

But after a short significant development, the pernicious consequences of the expansionary policy have appeared. Money expansion has created more than 10 trillion yuan in local debt and a big rise of the potential bad debt rate of banks. Also it has triggered a structural tax increase caused by the imbalance of payment and revenue.

To begin correcting the current situation, China should first cut taxes in the real economy to enhance its defenses in a period of export reduction and prepare for industrial updates in the future; Secondly, it should improve the efficiency of resource allocation in the capital market on the basis of strengthened supervision. In this way, the government can stimulate the economy by efficiently using the money stock, but not issuing more money. Thirdly, the reform on secondary income distribution which aims to narrow the wealth gap must speed up. Finally, administrative intervention in market must be reduced to promote the change of the administrative functions.

China's economy is headed on a downward path. Immediate measures need to be done to maintain growth. But they must be done through activating internal driving forces instead of a stimulus of expansionary policies. Otherwise, China's economy will have serious systematic risks instead of continued growth.

The author is a commentator with Oriental Morning Post.

(This post was first published in Chinese and translated by Li Shen.)

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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