China's Fiscal and Monetary Policy

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Article Summary
The article, published by The Business Times on 11 January 2010, reported that China’s government will continue to spend the full amount of its full stimulus in 2010 despite the fact that government has ordered banks to control lending and implemented monetary policy to prevent over investment earlier.

Since the financial tsunami and the bankruptcy of Lehman’s Brother in September 2008, the world’s economy took a deep plunge and the Chinese economy is no exception. In the wake of the global financial crisis, The Economist (2008) reported that China’s real GDP growth slowed to 9 percent in the third quarter of 2008 and export growth slowed to 21.1%. It was, in fact, well below analyst expectations and recent rates of expansion. We shall examine the various fiscal and monetary policies undertaken by the Chinese government in this report.

Fiscal Policy
In third quarter of 2008, China’s government thereby implemented economic stimulus packages to boost domestic demand and eased tight monetary policy introduced in early 2008, according to Maidment, P., (2008). Four trillion yuan ($586 billion) will be spent on upgrading infrastructure, particularly roads, railways, airports and the power grid; on raising rural incomes via land reform; and on social welfare projects such as affordable housing and environmental protection. As the article indicted, Chinese government has continued on its fiscal policy and plan to spend all it stimulus funds in 2010, through higher spending on public works and aid, mostly went to state-owned construction companies and suppliers of steel and cement to build airports and other public facilities. This is mainly because of Premier Wen Jiabao and other officials reckon that recovery has not firmly established and are cautious against complacency.

China’s GDP in 2009
While most of the country in the world are seeing real GDP growth in red in 2009, like Singapore real GDP growth rate is -1.3%, China posted a real GDP growth rate of 8.7%. This has reflected on the success of the fiscal stimulus pumped in by the Chinese government to close the recessionary gap in the economy while there was a threat of slowing of growth in 2008 due to the global economic downturn, especially a significant reduction in its export. China’s government fiscal policy to boost the country’s economic growth could be illustrated with the following graph.

As illustrated by the graph above, China’s 4 trillion yuan of government spending can be shown by arrow A, which shifted the aggregate demand rightward, from AD1 to AD1 + Change in G. A further rightward shift can be illustrated by arrow B, which is the government spending multiplier. The government spending multiplier is the ratio of the change in the equilibrium level of output to a change in government spending. Government spending multiplier could be calculated by 1/MPS. The government spending multiplier therefore further shifted the China’s aggregate demand curve from AD1 + Change in G to AD2.

The fiscal stimulus package proves to be a major success, and as the article implied, Chinese government will likely to spend the full amount of its planned stimulus in 2010, according to Finance Minister Xie Xuren, despite improvements in the economy and efforts to control bank lending. This has lead to the nation to post 11.9% growth in the first quarter of 2010 from a year earlier, the fastest pace in 3 years, as reported by Ito, A. (2010). The fiscal spending by China’s government is possibly caused by the deep reserves that China has, which hit a record high of $2.4 trillion (Bloomberg News, 2010). But this action has lead the Chinese economy to ‘over-stimulation’ or inflation as CPI rose and real estate price to increase substantially. A suggestion that the Chinese government could possible do to avoid inflation from it stimulus package is to stagger the stimulus package i.e. instead of pumping four trillion...
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