Soft landing is expected

The relatively wide maneuvering space the Chinese government still enjoys in its fiscal and monetary policies will help China's economy realize a "soft landing" this year.

From a fiscal perspective, the government will continue pushing forward structural tax reductions, including extending the trial of converting business tax to value-added tax and increased tax cuts for small enterprises. Local governments will possibly be allowed to issue local debt and government bonds to ease the fiscal shortage as the result of their declining land revenues in the context of national real estate regulations. To boost consumption and improve people's livelihoods, the government is also expected to earmark more money for the supply of public products, from improving the social security system to constructing subsidized housing for low-income residents.

From a monetary perspective, there is only a slim possibility that the central bank will make further interest rate cuts, as the CPI is expected to rise. Correspondingly, the monetary authorities will likely choose to lower banks' reserve requirements. Reverse-repurchase is expected to replace the issuance of bonds by the central bank, as a way of regulating market liquidity. Capital controls will likely be employed as a short-term means to check the speculative influx and outflow of international capital.

The yuan's strong appreciation since September will not continue into the months ahead, but a 2 percent appreciation can be expected over the year, in the midst of more obvious two-way fluctuations. Now is an appropriate time for China's central bank to improve the yuan's exchange rate formation mechanism and give the market a bigger say. It will be beneficial to China's ongoing economic structural adjustments and enhance the central bank's decision-making independence.

China should get accustomed to a slowed economic growth and step up structural adjustments. It should accelerate its income distribution reform, open services to non-governmental capital and deepen market-oriented pricing reforms for elements of production. An internally driven economy that pursues balanced growth between consumption and investment, between manufacturing and services, and among different regions will help China play a bigger role on the international stage.

The author is a researcher with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences.

(China Daily 01/17/2013 page8)