China To Launch More Loosening Measures To Support Economy


The author is Song Yu, China economist at Goldman Sachs Gao Hua

The Chinese government made a number of policy announcements today. Premier Li held a State Council meeting, which decided to step up water project construction and develop "emerging industries."

The country will aim to have a timely launch for the 172 water conservancy projects scheduled in the five-year development plan (even though the projects were included in the five-year plan already, timely implementation is key for near term growth).

The government will push forward key projects on irrigation to support agricultural growth, and also allow social (non-state) capital to participate in these projects.

Also, the government will step up funding support for emerging industries. More funding will be allocated to emerging industries to encourage innovation and entrepreneurship, and to help small and medium sized enterprises.

Water projects are directly related to agriculture production, which is a key focus of leadership. This was shown by the fact that the Central Economic Work Committee made agricultural production the number one task out of the 6 main tasks for 2014, a rarity. Water projects are also important in terms of environmental protection.

At the same time, the Ministry of Human Resources and Social Security held a press conference during which the Minister said more employment supports will be on the way in the coming weeks.

Prior to this, the State Council already held two meetings related to employment, which shows the government is aware of the pressures on the employment market despite the lack of large-scale job losses so far.

Also, the Ministry of Finance announced 10 provinces and cities will be allowed to issue local debt this year. The National Development and Reform Commission (NDRC) announced 80 projects were open for private companies to participate. The sectors involved include traditional and renewable energy, transportation infrastructure such as railways and subways, and IT projects. Private investors can participate via joint ventures or subsidiaries.

The government has been releasing policy initiatives continuously since March. We believe these policy announcements show the government is not happy with the extent of economic weakness, despite statements de-emphasizing the importance of GDP growth.

Instead of simply expanding monetary and fiscal policies to support investment, the government is paying more attention to structural reform measures which are positive for growth.

Such an approach is preferable to a simple and aggressive loosening approach in terms of the long term structure of the economy but may work less rapidly.

This is especially so with the private-public partnership, which requires better institutional protection of property rights to work effectively.

This is part of the reason why the economic rebound is taking a bumpier path than before. We believe there will be further policy initiatives in the coming weeks, including in the property sector, until there are clear signs of a stronger economy.

(The article has been edited for clarity)

 
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