MACROECONOMY UNDER

At the sidelines of the First Session of the 12th National People’s Congress held from March 5 to 17, Zhang Ping, Minister of the National Development and Reform Commission, Chen Deming, Minister of Commerce, and Zhou Xiaochuan,Governor of the People’s Bank of China, answered questions on economic and financial issues at separate press conferences. Edited excerpts of their answers follow:

Going Ahead With Reforms

Reform and opening up are fundamental forces that drive China’s development and progress.Over the past three decades, China has made sign ifi cant achievements in improving people’s livelihood, increasing overall national strength and raising productivity. Without a doubt, credit should go to China’s reforms.

The 18th National Congress of the Communist Party of China put forward the goals of fi nishing its plans to build a moderately prosperous society and having a relatively complete socialist market economy in place by 2020. To achieve these goals, China will continue to focus on reforms.

The focus of restructuring the economic system should be on managing the relationship between the government and the market.That is to say, the market should play a more profound role in resource allocation and the government should further improve macroeconomic control.

As Premier Wen Jiabao pointed out when delivering the government work report on March 5, reforms should be carried out in the following aspects. We need to improve the economic system by consolidating and developing the public sector and supporting and guiding the development of the private sector.We should deepen reform of state-owned enterprises, fiscal and taxation systems, financial system, investment and fi nancing systems, pricing mechanism, public institutions and income distribution.

Boosting Consumption

Expanding domestic demand will remain China’s long-term strategy for economic development.China will stimulate domestic consumption and improve the efficiency of government investment in order to expand demand.

Consumption has played an increasingly important part in economic growth. In 2012,consumption contributed 51.8 percent to the country’s GDP growth, overtaking the 50.4 percent contributed by investment.

The government will work to create more jobs in cities and boost salaries in a way that won’t damage enterprises’ ef fi ciency.

In rural areas, the government will raise the state purchase price of farm produce this year and make it easier for rural residents to work in urban areas.

More public spending on education, social security and healthcare will reduce the need to maintain large savings accounts and increase people’s will to spend.

The government will also focus on infrastructure that benefits people’s lives, such as public housing, hospitals, schools and the renovation of dilapidated houses in rural areas.

Embracing the Outside World

Opening up must benefit China’s efforts to transform its economic development pattern and adjust its economic structure. It must also facilitate China’s development,reform and innovation.

Opening up is meant to bring the global market to China, and our companies will encounter a more heightened market competition in the process. But such competition will increase our strength and enable us to better participate in global cooperation.

To further open up, priorities will be given to the following. China will open up new sectors,such as the service sector, and open up more regions, including inland areas and border areas;it will balance foreign trade by stabilizing exports and expanding imports; it will open up its capital account to attract foreign investment, while paying particular attention to the “going out”strategy (overseas investment).

In addition, China will participate in global economic governance to preserve a multilateral trading system, establish free trade zones and institute a fair and open international trade environment.

Currently, China is negotiating with the United States on a bilateral investment protection agreement. It is pressing forward in free trade zone talks with the Regional Comprehensive Economic Partnership, which involves the 10 ASEAN member states, as well as China, India, Japan, the Republic of Korea and Australia. China is also engaged in free trade zone talks with Australia and six Gulf nations, and it has nearly completed negotiations on free trade agreements with Iceland and Switzerland.

Outbound Investment

When assessing investment by Chinese companies, a small group of lawmakers in some developed countries still have a Cold War mentality.

For every $3 planned for investment in the United States, only $1 is approved by the U.S. authorities. But this is not the mainstream.Chinese investment is increasingly welcomed around the world.

The Chinese Government requires businesses investing overseas to abide by local laws,respect local cultures and traditions, and shoulder social responsibility.

The Chinese Government also supports Chinese enterprises to safeguard their legal rights in overseas markets, and would push host countries to create a more transparent and just environment to boost the con fi dence of foreign investors.

U.S. scrutiny over China’s investment is understandable, and China is establishing its own system to examine foreign investment at home and hopes to learn from experiences in the United States.

Meanwhile, such examinations should be open and transparent in a way that can make overseas investment more predictable. For example, a foreign company may be asked by U.S. authorities to suspend or terminate its business three years after the start of operations, which can result in heavy losses.

Money Supply and Inflation

The People’s Bank of China has stressed a need to control consumer prices. The broadest measure of money supply, M2,is closely linked to nominal GDP growth.When there is an oversupply of money,inflation may rise; when money supply is insuf fi cient, economic growth will be frustrated.

We have done a good job on this front during the SARS epidemic period in 2003 and the global fi nancial crisis in 2008. Some people tend to fi x M2 according to GDP. However, in terms of the M2 to GDP ratio, Japan has higher ratio than China, but it suffers from de fl ation rather than in fl ation.

China has a higher savings rate than most countries. According to past experience, countries with high savings rate and hefty indirect fi nancing activities usually have high M2 growth.Nevertheless, as long as we keep M2 growth at a proper level, drastic consumer price hikes will not happen.

Risks of Local Gov’t Debt

We should not underestimate risks in local government financing vehicles, nor should we overestimate them. According to the categorization of local government financing vehicles by the China Banking Regulatory Commission, a large number of local government fi nancing vehicles are funding projects including urban infrastructure and public services, and these projects are largely safe from insolvency if banks deal with them properly.

Another category of lending is based on mortgages, and the risks are controllable as long as mortgaged goods do not change remarkably.

But about 20 percent of local government financing vehicles are funding projects which are largely non-profitable and thus the debts have to be paid with other income.

More attention should be paid to the risks.Further reforms are needed to introduce new fi nancing tools so as to ensure fi nancial support for the country’s urbanization.

At the same time, some local governments lacked proper financing channels when they launched projects amid urbanization. We should carry out more reforms,introduce more financial tools and make some adjustments to support the fi nancing of projects which are likely to bring social bene fi ts. ■