China to expand government expenditure to stimulate the economy

China’s top policy making body indicated that the administration is going to introduce a group of measures to correct the existing abnormalities and guide the economy to achieve higher growth. The Central Economic Work Conference, where economic policy guidelines are taken, decided to increase government deficit and to make monetary policy more flexible.

China is experiencing moderate growth, which according to the policy makers is the ‘new normal’, given the economy’s current phase of development.

But a more fundamental and deep problem for China is that in the context of declining global demand for its exports, domestic demand is not picking up. Declining production, excess inventories and falling employment growth are concern for the government.

Low domestic market size for China’s export oriented economy necessitates artificial demand injection.  The new policy indicates that government will widen its deficit. This is a clear indication of an expansionary fiscal policy supported by sizable deficit budget.

The policy also hints the use of flexible monetary policy – indicating that a lower interest rate policy may also be tested.

But the recent crash in the stock market was a product of the government’s encouragement for people to purchase shares. It backfired and hence, any official policy measure to stimulate the economy may be implemented cautiously and gradually.

The better and safe option is to go for additional government expenditure.

At the same time, the new policy also acknowledges market oriented initiatives like bankruptcy reforms to handle the potential fall in production and corporate distress.

The think tank has suggested several market oriented measures that can be visible in capitalist economies to sort out the recession mode operation of the economy.