How can China prevent a hard landing?

Editor's Note: Only two months ago, China's biggest fears were over the possibility of lingering inflation. But now, as Premier Wen Jiabao said twice earlier this week, a greater concern is the prospect of too great and too abrupt of a slowdown.

Can the second largest economy of the world maintain its balance? If so, how? How can China maintain a good growth rate while steering clear of the twin obstacles of sky-rocketing prices and investment bubbles?

China Daily posed four questions in this vein to five prominent economists:

 

 

 

Feng Fei

Director-general of the development research center of the State Council's research department of industrial economy and a guest economist of China Daily

 

A1

The foundation of stimulus policies, Keynesian theory, has played an important role in helping the country cope with the financial crisis, but it also could lead to inflation or even stagnation.

Now is the time to consider its opposite, supply-side economics, which was adopted by Ronald Reagan in the United States in the 1980s. Deregulation, reforms to the economic system and a market more open to private capital should be at the top of the list of priorities.

Meanwhile, the government should continue to make structural reforms in two ways: by greatly easing the tax burden on small businesses and by adopting favorable tax policies for strategically important emerging industries.

Policymakers should further reform their investment and monetary policies to better reflect supply and demand. These measures will operate much like herbal medicine, which takes a long time to produce its benefits but has few side effects.

A2

The lower-than-expected inflation seen in the first quarter (at a rate of 3.8 percent) was in line with the slower economic growth (at a rate of 8.4 percent). If a bigger priority is to be placed again on economic growth, inflation will be under greater pressure as well. Food prices are a big contributor (to inflation), but rising labor and resource costs will have even bigger effects. China is gradually losing its demographic advantages, a change that will pose long-term difficulties related to inflationary pressures in China.

A3

The regulations imposed on the real estate market are unlikely to change quickly, even though a slower real estate industry and slower steel and non-ferrous metal industries did prove to be a drag on economic growth in the first quarter.

It's true the government is faced with a difficult choice. The regulations have yet to be effective or meet customers' expectations. Since real estate regulation is not only an economic issue but also a social one, the control policies shouldn't be relaxed at this point.

I strongly suggest that the government adopt more targeted and effective measures to curb speculative behavior - for instance, strictly restraining house sales by substantially increasing sales taxes.

A4

Expanding domestic demand shouldn't be seen as a short-term remedy that merely has the purpose of expanding domestic demand, but as a long-term strategy.

Consumption could be boosted in the short term with the use of incentive policies meant to encourage purchases of new-energy vehicles and energy-efficient household appliances. But without improving household incomes, increases in consumption cannot be sustained.