Monday, August 18, 2008

Timeline of China's fiscal and monetary policy since 1995

Here are some facts about China's fiscal and monetary policies from the present back to 1995.

-- Tight monetary policy

Earlier this year, facing pressure from surging inflation, a resurgence in fixed-asset investment and excessive lending and liquidity, China decided to shift its monetary policy from "prudent" to "tight".

Tight policy has included raising commercial banks' reserve-requirement ratios, allowing the currency -- renminbi -- to appreciate and controlling bank lending.

The latest move was in June, when the central bank -- People's Bank of China -- raised the reserve ratio by 1 percentage point in all: 0.5 point effective June 15 and another 0.5 point effective June 25. The rise on June 25 was the sixth this year and brought the ratio to a record 17.5 percent.

The tight policy appears to have had an impact. The consumer price index eased to 6.3 percent in July from a near 12-year high of 8.7 percent in February.

Economic growth slowed to 10.4 percent in the first half of 2008 from 11.9 percent for all of 2007.

-- "Prudent" fiscal and monetary policies

China switched to a "prudent" policy at the beginning of 2005. During 2005, the country reduced issues of long-term National Construction Bonds to 80 billion yuan from 110 billion yuan the previous year and cut the fiscal deficitby 19.8 billion yuan to 300 billion yuan.

In 2007, the PBOC raised the reserve ratio 10 times, from 9 percent in January to 14.5 percent as of December. The central bank had raised the ratio only five times over six years since 2000.

-- "Proactive" fiscal policy and "prudent" monetary policy

The proactive fiscal policy and prudent monetary policy were adopted in 1998 to counteract the negative impact of the 1997 Asian financial crisis.

China issued 910 billion yuan worth of national bonds over these years and invested the proceeds in infrastructure. The move boosted domestic demand, which had been weakened by the financial crisis, and contributed 1.5 to 2 percentage points of national output growth each year.

-- "Appropriately tight" fiscal and monetary policies

To rein in high inflation that started in 1993, China imposed appropriately tight fiscal and monetary policies. There was a surge in fixed-asset investment in the latter half of 1992, which was followed by major food price rises in 1993.

After the new policies were launched, the PBOC stepped up efforts to control money supply and finally reduced the consumer price index from 21.2 percent in January to 12.3 percent in August in 1995. The annual price increase was kept under 15 percent and gradually leveled out in the following years.


No comments: