Over the course of the late 1990s, the government was gradually learning to collect market-based taxes on profits, income and value added – a process that led to a sharp increase in revenue growth in the beginning of this decade. And by 2002, it was clear that the days of fiscal pump-priming were over; with macro policy concerns shifting to overheating and excess capacity, local and central authorities pulled back considerably on their own infrastructure spending plans.
… The bottom line is that by 2004, the Chinese government suddenly found itself with money to spend. With tax revenue pouring in, tighter spending policies and falling budget deficits, the authorities were finally able to turn their full attention to the pressing plight of farmers and the poorer urban classes. Since then, we've seen a rapid succession of policies: the elimination of agricultural taxes and fees, a large rise in grain and food production subsidies, better funding of local government budgets, as well as the long list of new measures outlined by the premier yesterday.
Many observers have tried to explain the new policies solely by pointing to the personal qualities of President Hu and Premier Wen, for example, that the new leadership is much more "grassroots-oriented" and thus more attuned to the needs of the lower classes in China. We agree that the current government has made farmers and rural development an urgent priority – but then, going back and reading historical policy statements, so did the previous leadership generation. In our view, the real "quiet revolution" is the flood of new budgetary resources that allows the current government to put rhetoric into practice.
From Deutsche Bank's Asia Economics Monthly by Greater China Chief Economist Jun Ma, March 2006:
As part of the government's continued efforts to control investment overheating, bond-financed capital spending (treated as an extra-budgetary item) will be reduced to RMB60 billion this year from last year's RMB80 billion, while budgetary spending on capital projects will be increased by RMB10 billion. Therefore, overall capital spending from the central government will decline by RMB10 billion, implying, according to our estimate, a 3% drop of the general government's total capital spending from 2005. This reduced budgetary preference for capital expenditure defies the misperception that infrastructure building would continue to drive high investment growth.
While capital spending will be reduced, a few other sectors will receive stronger budgetary support this year. These include science and technology (a 19.2% increase in budgetary allocation compared with 2005), defense (up 14.7%), agriculture and rural development (up 12.4%), as well as social services, pensions and civil servants wages. It is clear that the government is attempting some concrete measures to stimulate consumption, raise the value added content of the economy, and support agricultural development.
Several key market implications of these measures are: (1) China will become less of a support for global energy (especially for oil and coal) demand growth; (2) the 2006 budget will be contributing negatively to investment growth (and therefore demand for construction materials); and (3) stronger fiscal support bodes well for the technology (eg, IT and alternative energies) and agriculture sectors.
From the OECD policy brief "Challenges for China's Public Spending," March 2006:
A large part of public spending funds investment, with total outlays amounting to 9% of GDP in 2002. This ratio is higher than that of nearly all OECD countries and most other large developing countries. In addition, a relatively large proportion of spending, almost one-fifth of on-budget outlays, goes to public administration, most of which is spent by sub-national governments. Investment and public spending have both increased as a share of total government spending over the past decade.
In contrast, a relatively low portion of outlays are made on basic human welfare and development needs, such as education, health, science, and social security. Furthermore, the share of total spending going to education, health, and science has fallen over the last decade. In relation to GDP, public spending on education and health is well below that of nearly all OECD as well as most comparable developing countries, while private spending in these areas is among the highest in the world.
Government authorities recognize that budget planning and implementation, oversight, and service delivery must be modernized and improved if the money is to be used effectively. Notably, authorities have been working since the late 1990s to bring onto the regular budget the legitimate expenditure activities that have been carried out through extra-budgetary accounts or off-budget. Vigorous efforts are also being made to suppress unauthorized off-budget funds and surcharges, especially for local authorities in rural areas.
Capgemini Senior Vice President Colette Lewiner on China's energy future:
The China power market will require, on average, 48 gigawatts of new capacity every year, which is equivalent to two-thirds of the UK's total installed capacity today. Even with the additional capacity planned, per capita consumption of electricity in China will only reach the level of the US in the 1950s.
? In the past 3 years, a nationwide power shortage spurred a new wave of physical investments in new power plants, which will restore a balance of short-term demand and supply expected by 2006/7. But the huge growth of the Chinese economy means that, without extra investment, that surplus will dissipate once again between 2010 and 2020.
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