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China Embraces the World Market

Case Studies - Specialist Boxes

China's macroeconomic policies in 2001

Fiscal policy

Since 1998, the focus of Chinese Government fiscal policy has been stimulating domestic demand, in part to compensate for lower export growth following the Asian financial crisis and the subsequent slowing of world growth. It issued state bonds to finance investment as to revive weak domestic demand. Some studies indicate this government investment contributed to 1.5, 2.0 and 1.7 percentage points of China's total economic growth in 1998, 1999 and 2000 respectively (State Planning Committee Macroeconomic Research Institute, 2002). The Government continued to finance investment by issuing new state bonds into 2001, with infrastructure investment increasing by more than 10 per cent in 2001. However, as China's savings have long exceeded its investment, the strong fiscal expansion in recent years should not have crowded out other investment but instead, could stimulate it.

Another expansionary measure employed was to raise public servant wages three times, each by 25 per cent, in 2001 and 2002. Considering that there are more than 30 million public servants in China, the wage increase of public servants generated a substantial increase in average wages particularly in urban areas. Hence, consumption growth exceeded 10 per cent in 2001, compared to only 6.8 per cent growth in 1998.

Monetary policy

In 2001, the growth of money supply measured by M0, M1 and M2 were 7 per cent, 12.7 per cent and 14.4 per cent respectively. GDP grew 7.3 per cent while inflation rates measured by consumer price index, commodity retail price index and producer price index were 0.7 per cent, -0.8 per cent and -1.3 per cent respectively. Some commentators believe money supply growth was sufficiently greater than GDP growth rate but others believe money supply growth was too slow to stimulate aggregate demand, potentially leading to a deflation trap (Zhang, 2002). Furthermore, household savings in the commercial banks grew 14.4 per cent but commercial bank loans grew only 11.6 per cent, constricting money supply and investment.

In 2001, to counter this trend, the Chinese monetary authority authorised substantial reductions in commercial bank lending rates and encouraged banks to increase lending to households for mortgages, education, cars and other consumer purposes. However, these policy changes failed to delivery an effective increase in the money supply in 2001. This was mainly due to constraints on banks' commercial lending due to their concerns about incurring new non performing loans.

However, in the 12 months to August 2002, total bank lending to non-financial sectors expanded a robust 22.4 per cent, up from 6.6 per cent growth in the 12 months to August 2001. Moreover, money supply measures M1 and M2 expanded by over 17 per cent in the year to October 2002, compared with less than 13 per cent growth in the year to October 2001.

Author: Associate Professor Yong Cao, Division of Applied Economics, Nanyang Technological University, Singapore.


State Planning Committee Macroeconomic Research Institute, 2002, "Review of 2001's Macroeconomic Experience and the perspective of 2002's Macroeconomic Situation" (2001 nian hongguanjingji yunxing huigu yu 2002 nian zhanwang) Management World (guanli shijie), No. 1/2002.

Zhang Zhonghua, 2002, "On monetary policy, capital market and economic growth in China" (Lun woguo de huobi zhengce, ziben shichang yu jingji zhenzhang), Management World (guanli shijie), No. 4/2002.

This page last modified: Tuesday, 10 December 2002 11:42:34 AM

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