Looking at the bigger picture

Despite pressure from economic downturn, the government will show greater tolerance unless it threatens to cross the bottom line

In a keynote speech delivered at the opening ceremony of the Forum for Asia Annual Conference 2014 on April 10, Premier Li Keqiang said China will not adopt short-term stimulus policies to address what are temporary economic fluctuations; instead it will focus on the sustainable and healthy development of the economy in the middle and long run.

China is in a critical period of economic structural adjustments. Its previous economic growth model driven by the expansion of investment has run out of steam and its economic engine has shifted to domestic demand. However, due to the lack of innovative domestic products domestic demand has failed to play its expected role as an engine of growth. The direct result of this was China's economic growth stayed at a comparatively low level in 2013. The full-year 7.7 percent growth in gross domestic product was the lowest in 14 years, while the GDP growth in the first quarter of this year was below 7.5 percent. It was in the face of these adverse economic circumstances that the State Council meeting held on April 2 once again urged the adoption of feasible measures to stabilize the country's economic growth.

Under such a central government policy tone, the local governments of Guangdong, Hainan, Jiangxi and Guizhou provinces and Tianjin municipality published their lists of key projects for the year, which represent a total investment of 7.13 trillion yuan ($1.14 trillion). Such colossal investment plans, coupled with some major infrastructure construction projects due to be unveiled by major enterprises, have caused concerns about a new round of stimulus packages, such as the ones the country launched in the wake of the 2008 global financial crisis, and fuelled market expectations for stimulus policies from the central government, such as the support of fiscal funds, investment expansion, a preferential taxation policy, as well as lowering banks' deposit reserve ratio and interest rates.

Over the past decade, the country has frequently turned to temporary stimulation measures to spur the economy, which has successfully guaranteed an economic growth above the expected level. The 4-trillion-yuan investment program launched by the central government at the height of the global financial crisis in 2008 effectively helped curb the spread of the contagious crisis to China and prevented its economy from suffering a severe recession. However, such an investment spree also produced obvious negative side effects, such as further increasing China's dependence on administrative regulations for economic growth and crippling to some extent the normal function of the market. At the same time, the sprawling investment campaign under an expansionist monetary policy caused excessive exploitation of resources and the environment and triggered serious inflation.

Conscious of the negative effects of short-term stimulus policies, the government has so far refrained from introducing any new stimulus, and instead focused more on the reform of government functions, such as simplifying administrative procedures and delegating some power to local governments, to release more market vitality. The government is also striving to build a long-term mechanism for national economic development. In the short term such changes will inevitably bring China some woes as a result of slower economic growth.