Macroeconomic Policies of the Government of China - Essay Example

ECONOMICS FOR GLOBAL BUSINESS Contents Contents 2 Introduction 3 Discussion 4 Fiscal policies 5 Monetary policies 9 Conclusion 11 References 12 Introduction This report is prepared with the aim of discussing and analysing the different macroeconomic policies devised and implemented by the Government of China and the Central bank of China over the last two years. The monetary policies, fiscal policies as well as the regulatory policies of the country are identified and discussed with the aim of understanding the current position of the country with respect to macroeconomic policy management. This report is also intended to understand the sustainability of these macroeconomic policies in the future years. The Chinese economy has emerged as a powerful economy due to its rapid expansion over the last three decades. The average annual growth of the Chinese economy has been around 10% in the last few years. The growth and expansion of the economy of China can be credited to the array of economic reforms that have been taken up in the country in the last few years. These economic reforms have made the Chinese economy more production oriented and has supported the increase in the production capacity of the nation. Presently, the government of China is focusing on developing a wide array of macroeconomic policies in the country which would support the accelerated growth of the nation and strengthen the economic system of the nation as well. China aims at maintaining the stability and innovativeness in its macroeconomic policies. The macroeconomic policies of China including both the monetary and fiscal policies are prudent and proactive. The central aim of the government of China is to support the economic growth and development through the management of the macroeconomic demand. Also, the country wants to respond adequately to the fluctuations in the domestic as well as the global business conditions through the introduction of effective and innovative macroeconomic policies. These macroeconomic policies have enabled the nation to prevent a build up of financial risks and inflationary pressures on the economy and also sustain the local employment levels. Discussion The macroeconomic policies of China are mainly formulated by the government of China and the Peoples’ Bank of China which is the central bank operating in the country. As in the case of other economies, the policymakers of China also employ a wide number of varied regulatory, monetary and fiscal policies. However, the operations of these macroeconomic policies are significantly different from the operations of the macroeconomic policies in the developed economies of the world. These differences can be mainly found in the development stage of China and other developed countries as well as in the distinct institutional characteristics of China (Lixin, 2012). A significant feature of the macroeconomic policies in China is that both the fiscal and monetary policies are implemented in a tightly controlled and coordinated manner. The overall direction of the implementation and the subsequent operability of the macroeconomic policies of China are decided by the Government of China (Barnett, 2004). This means that the activities and policies of the Central Bank are also largely controlled by the government. An example of the high level of control and coordination in the macroeconomic policy framework of China is that the government formulates and implements the fiscal policies through its influence in the investing operations of the local governments and the state owned enterprises. These local governments and state owned firms are also supported by the credit policies of the PBC which are aimed at ensuring that these companies can access funding from the central bank of China (Blanchard, 2011). These policies and techniques are starkly different from the trends in the developing countries in which a higher degree of independence in the functioning of the central banks from the state authorities can be identified. Fiscal policies The fiscal policies of China are fundamentally similar to that of the other developing economies. However, they are significantly differentiated from those followed in the developed countries. The government of China spends money with the aim of generating economic activities in the country. Nonetheless, the huge fiscal resources of China, the centrally planned and controlled economy and the backlogs in the infrastructure and development needed that the government of China placed suitable fiscal policies so as to direct huge amounts of money into the economy within a short period of time. The Chinese fiscal and monetary policies are more stringently coordinated and controlled by the central government as compared to the macroeconomic policy arrangements in the developed countries of the world (Organisation for Economic Co-operation and Development, 2011). Another significant feature of the fiscal policies of China is the existence of a predominant vertical imbalance in the fiscal position of the country. This means that there is a wide gap between the revenue and expenditure positions of the state level governments and the Central Government of China. The Central Government of China accounts for a mere 20% of the expenditure but raises more than 52% of the total revenues. This fact indicates that the Central Government has more control on the fiscal resources of China. However, in order to ensure more stability in the fiscal position of the nation, the Central Government has started to coordinate its expenditures with multiple levels of the state government including country, prefecture, township and provincial governments. A lack of a highly functional process of intergovernmental transfer from the Central government to various state level governments further complicates the fiscal policy transmission in the country (Mao, 2009). However, China is introducing suitable regulatory policies to support the mobilization of investments through the use of off budget financing mediums. The fiscal policies in China are implemented by a number of local and central government agencies. The main role of the State Council is to formulate and monitor the overall direction of the fiscal policies while the implementation of the policies is managed by the local governments. This has helped to maintain the fiscal balance of the country in the last few years (International Monetary Fund, 2012). Figure 1 (Source: Ma, Xiandong and Xi, 2011) The economy of China has been experiencing clearly identifiable cycles in terms of inflation and growth in the last decade. There have been noticeable fluctuations in the demand levels in the country due to the responses to the stemming domestic imbalances and the recent developments in the business cycles. China continuously strives to improve the overall macroeconomic policy framework in the nation so as to ensure higher growth, stability, employment and to control the rate of inflation in the country. The People’s Bank of China aims at meeting the inflation and growth targets defined by the State Council through the control on the exchange rates and that of the credit growth and domestic money supply in the economy. The PBC strives to keep the Renminbi (RMB) appreciating which is supported by the consistent growth in the export activities of the country (Lardy, 2000). Also, the monetary and fiscal policies are aimed at increasing the gross domestic product of the nation and controlling the inflation rates in the economy as well. Figure 2 (Source: Ma, Xiandong and Xi, 2011) The property market in China has significant impacts on the economic activities in the country. The property investment cycles largely contribute to the fluctuations in the aggregate demand level in the economy. In order to respond to the pressures from the property market, the Chinese government is focusing on developing and implementing macroeconomic policies that are likely to boost the property market. These measures included the reduction of the minimum mortgage rates of interest, the reduction of the down payments amounts needed for buying the properties, and also the reduction of the minimum holding period required for qualifying for exemption from the capital gains tax amounts (Dai, 2001). These fiscal policy changes in the country have created desirable outcomes with both the property and the turnover prices increasing beneficially in the last two years. Figure 3 (Source: Ma, Xiandong and Xi, 2011) Monetary policies The monetary policies of China focus on implementing higher levels of control and regulation in the financial segment and comparatively inflexible inflation rates and exchange rates. The banking segment in China is relatively concentrated and is dominated by a few numbers of state owned banks. The interest rates in the country are decided by the Central Government so as to achieve a suitable margin between the lending rates and the deposit rates. The Central Bank of China largely controls the state owned banks with respect to the amount of money they can lend at the pre decided margins. The PBC has been aiming at increasing the policy interest rates due to the noticeable signs of an upward movement in the levels of inflation in China. Another main macroeconomic policy tool of China, interest rate is identified to be the most effective instrument that can be used to control the inflation levels (Sadeghian, White and D’Arcy, 2013). The primary tools of monetary policy formulation and implementation as used by China include the reserve requirements, rediscount rates and the open market operations. Other instruments like window guidance policies, credit policies, and instructive credit plans are used to complement these basic tools for monetary policy implementation. Both the market based and non market based approaches are used in the monetary policies of China. This means that the PBC formulates and implements the macroeconomic policies through a combination of direct and indirect market tools and instruments with the aim of controlling the composition and volume of credit flows in the economy. Recently the central bank of China i.e. the PBC has started using the growth rates of bank lending as well as money as the intermediate explicit targets in the macroeconomic policy framework (Ballantyne, Garner and Wright, 2013). The Central government of China has extensively focused on using the instrument of Reserve Requirement Ratio (RRR) in its monetary policies in the last two years. Reserve Requirement Ratio (RRR) is used to determine the amount of deposit liabilities that is required by the banks to hold their assets at the central bank. The People’s Bank of China (PBC) has changed the RRRs with the aim of controlling the supply of finances which are available within the country. This macroeconomic policy has been devised for controlling the growth in the national credit levels (Nabar, 2011). Since 2008, the People’s Bank of China (PBC) has used the Reserve Requirement Ratio as a critical instrument of their monetary policy formulation. The main reason for this has been the increasing use of the foreign exchange inflows. The PBC has undertaken the purchase of the foreign exchanges inflows with the aim of keeping the exchange rate under control as per the management of the floating exchange rate policy of China (Allen, Qian and Qian, 2005). Figure 4 (Source: Ma, Xiandong and Xi, 2011) Conclusion China has achieved much progress in its economy since the economic reforms and the subsequent opening up of the economy. Though there have been many problems associated with the internal as well as external influencing factors of the economy, yet the macroeconomic management of China’s economy has been an efficient and effective one. The country has been able to maintain a high growth rate in the economy and to control the inflation rates to a desirable extent over the last decade. The economy of China is becoming more market oriented and developed. This has made it necessary for the country to shift from the direct methods of implementing policies to indirect flexible methods of maintaining the bank reserves and liberalizing the banking system in order to create a more developed macroeconomic position of the nation. Therefore, innovative and effective fiscal and monetary policies should be introduced for the effective macroeconomic management in China. It can be identified that the macroeconomic policies and the overall macroeconomic management of China have been much distinct and efficient. However, the Government of China as well as the People’s Bank of China should focus on preparing the economy for the fiscal and financial instabilities that may arise in the future. This should be done by continuing the macroeconomic policies which add value to the economy and also introducing new macroeconomic policies in order to help the economy adjust to the changing economic requirements. References Allen, F., Qian, J. & Qian, M. 2005. Law, finance, and economic growth in China. Journal of Financial Economics, 77(1), pp 57-116. Ballantyne A., Garner, M. & Wright, M. 2013. Developments in Renminbi Internationalisation. RBA Bulletin, 14(1), pp 65–74. Barnett, S. 2004. China’s growth and integration into the world economy: prospects and challenges. Washington: IMF Occasional Paper No 232. Blanchard, O. 2011. Macroeconomics Updated, 5th ed. Englewood Cliffs: Prentice Hall. Dai, G. 2001. Chinas Monetary Policy: Retrospect and Prospect. World Economy and China, 3(1), pp.90-91. International Monetary Fund. 2012. Country Chapter: People’s Republic of China, in Annual Report on Exchange Rate Arrangements 2012. [Online]. 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Sadeghian, D., White, S. & D’Arcy, P. 2013. Macroeconomic Management in China. [Online]. Available at http://www.rba.gov.au/publications/bulletin/2013/jun/2.html. [Accessed on 24 October 2014]. Read More