Fiscal, monetary policy top reform concerns

BEIJING - China's key fiscal and monetary policy will be kept unchanged in 2014, signaling that the government will target internal structural reforms while maintaining stability and containing risks, analysts have said.

A statement released on Friday after the country's four-day central economic work conference said China will continue to implement a proactive fiscal and prudent monetary policies in 2014, a combination that the country has held onto since 2011.

The tone of the fiscal and monetary policies was kept unchanged because the country has been facing similar downward pressure and uncertainties amid the global economic downturn in recent years, according to Jia Kang, head of the fiscal science research institute under the Ministry of Finance.

Jia said the policy combination will work to guard against upside risks in consumer prices resulting from mounting liquidity in the past few years, as well as being conducive to adjusting economic structure.

Adjusting economic structure is a core task that the leadership has repeatedly stressed and written again into the list of major economic tasks for 2014. They vowed greater effort to resolve overcapacity and suggested a solution via innovation in Friday's statement.

Gao Peiyong, an analyst with the Chinese Academy of Social Sciences, said inflationary pressure and financial risks such as local government debt will restrict solutions for China's monetary policy.

On the fiscal side, a proactive policy is necessary for realizing the goal of "making progress while maintaining stability," Gao said.

For specific fiscal measures, the government will continue to adjust the structure of expenditures, spend money more wisely, improve structural tax cuts and increase the number of experiments for replacing turnover tax with a value-added tax (VAT), according to the statement.

According to Gao, the key to current economic system reform is to reduce government intervention and let the market play a decisive role, while the most effective way of doing this is to expand the scope of tax abatement measures, including the ongoing VAT tax reform.

The 2014 fiscal policy should closely serve a bigger picture of deepening comprehensive reform, Jia Kang suggested, adding that special attention should be given to transforming government functions and reducing administrative approval procedures.

As for monetary policy, when downward pressure is not cleared, it is necessary to keep reasonable growth of monetary credit and financing, in order to provide for a steady economic rebound, said Song Li, deputy director of the Institute of Economic Research at the National Development and Reform Commission.

M2, a broad measure of money supply that covers cash in circulation and all deposits, increased 14.2 percent year on year to 107.93 trillion yuan (17.65 trillion U.S. dollars) at the end of November, latest data showed.

Full-year M2 growth may miss the government macro-control target of 13 percent, putting pressure on the central bank to curb liquidity, but the pressure of the economic downturn points the opposite way for monetary policy.

Analysts said keeping monetary policy neutral and stable is the best choice for next year.

Friday's statement outlined other monetary policy measures, including optimizing the funding and credit structure and increasing the proportion of direct financing.

The statement also noted that macroeconomic control should be calibrated to contain China's reform concerns.

Song Li said that macroeconomic control in other countries is mainly an adjustment of economic aggregates, in a bid to address cyclical fluctuations, but China's has to handle a mix of issues ranging from aggregates, structure to system.

"For the fiscal and monetary policy to come into effective play, we need the support of reforms in the fiscal and financial system, " said Song.