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Balancing the Budget Stressed Again




China is considering gradually reducing the budget deficit and moving back to a tighter fiscal policy, though the country is relying on massive loans to stimulate the economy in 1999, Vice-Finance Minister Lou Jiwei said recently at a business conference in Beijing.

It was the right choice to introduce an active fiscal policy last year to generate demand and invigorate the economy, but such a policy can only be a short-term one, he said.

China had originally planned to slash its deficit year by year during the 1996-2000 period, and it was hoped that the country could achieve a balanced budget early next century.

Increased government borrowing since last year has postponed the plan. Lou's remarks indicated that the government had not given it up.

The government's revenues in 1998 equaled 12.4 percent of the gross domestic product (GDP) of the year, which was one of the lowest in the world. And the budget deficit was set to 46 billion yuan at the National People's Congress in the spring of the year, down from 58 billion yuan in 1997.

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It was the right choice to introduce an active fiscal policy last year to generate demand and invigorate the economy.

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China's weak fiscal strength means that it must be very cautious in expanding the deficit, said Li Rongrong, Vice-Minister of the State Development Planning Commission.

"We must stick to the implementation of a balanced budget as our long-term goal," he said.

But slow economic growth in the first half of the year prompted the government to launch a hugeinfra structure construction program to generate demand.



An extra 108 billion yuan of treasury bonds were issued to fund the program. The deficit resulting from the measure was spread on the budgets of 1998 and 1999. Consequently, the 1998 deficit was raised to 96 billion yuan.

The measures did inject some energy into the economy last year. GDP growth climbed to 7.6 percent in the third quarter and 9 percent in the fourth quarter, as compared to 7 percent in the year's first half.

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China's weak fiscal strength means that it must be very cautious in expanding the deficit

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Officials believe the active fiscal policy will remain necessary in 1999 as the macroeconomic environment has not changed much. The government also needs more money to complete the projects it launched last year.

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We must stick to the implementation of a balanced budget as our long-term goal

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As a result, the state's deficit for 1999 was set at 150.3 billion yuan.

Experts said China's falling prices are helpful for the government's active fiscal policy, because they greatly reduce the possibility of inflation caused by the increased spending.

But they also said that the expansion in the deficit should be effectively controlled in case prices started to inch upward.

BEIJING REVIEW, MAY 17, 1999

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Measures Called To Absorb Funds

China must put forward further measures to attract direct foreign investment as international companies are becoming more cautious when investing abroad in the wake of the Asian financial crisis, stated analysts.

"What has been easy for China in the past is now becoming more difficult," said Thomas Klotz, Vice-President of A T Kearney (Hong Kong) Ltd.

"There is a need for a change in the mind-set. China has to become more active in seeking direct foreign investment," Klotz said.

The Ministry of Foreign Trade and Economic Cooperation says that China will further open up to the outside world in order to attract more foreign investment. China must also improve the quality of the utilization of these funds.

Hu Angang, research fellow at the Research Center for Ecoenvironmental Sciences, called for a unified foreign direct investment policy as well as a treatment policy for foreign companies.

"Furthermore, there is a need for a transparent legal framework, reduced transaction costs and improvements in approval and registration procedures," Ru said.

Ernst Behrens, president of Siemens China operations, said the key is whether China provides foreign companies with a level playing field and allows them to become an integral part of the country's economy.

"If this can be established, the second round of foreign investment could soon be in place," said Behrens.

Virginia Kamsky, chairman and chief executive officer of Kamsky Associate Inc. said that she sees a very "flexible period ahead for foreign investors" and "feels positive about opportunities" in many sectors including agro-business, chemicals, information technology, electronics, environmental protection, entertainment, financial services and health care.
BEIJING REVIEW, MAY 17, 1999

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