Macroeconomic Policies in the Government and Central Bank of China - Essay Example

MACROECONOMIC POLICIES IN CHINA By Macroeconomic policies in the Government and Central Bank of China A country’s macroeconomic policies act as a guide to economic development. Macroeconomic policies are aimed at reducing inflation, ensuring stable growth and raising employment levels. The government and Central Bank of China are governed by its macroeconomic policies in its quest of meeting its social and economic needs. These policies are fiscal policy and monetary policy (Rada and von Arnim, 2012). Fiscal policy encompasses using government spending, taxation and borrowing to influence the country’s economy, its growth, GDP and its employment levels. Monetary policy involves regulating the money supply and interest rates by a central bank with the aim of controlling and stabilising the currency (He and Chen, 2014). Over the last two years, china’s macroeconomic policies aim at containing inflation to 4% eventually, to contain real estate by bringing prices of houses down, to maintain a decent growth rate of about 8 to 9% and to preserve the value of China’s foreign assets (He and Chen, 2014). This essay discusses the monetary and fiscal policy as used by the government and Central Bank of China. Fiscal policy China has used a proactive fiscal policy over the last two years. A proactive fiscal policy is a moderately expansionary policy, which creates demand and triggers economic growth by growing domestic demand (Zhang, Fan and Haan, 2010). The policy has over the period aimed at ensuring the steady growth of China’s economy, making proper adjustments to its economic structure, promoting reforms and benefiting its people. That said, the policy continues to try to maintain balance between enhancing economic growth, keeping prices stable and protection against financial risks. Unfortunately, China’s economy risks being stalled. This was seen in 2014 where the annual GDP growth hit a low of 7.4% (see figure 1), the lowest rate since 1990 (Wei, 2015). However, as many economic policy enthusiasts believe, continued use of moderately expansionary policy will generate positive results on China’s economic growth in the midst of slow export growth. Figure 1 (Wei, 2015) The expansionary policy is aimed at spending to generate income. Build-up of development and infrastructure needs and vast fiscal resources have made China channel immense spending into the economy. China has in recent years has relied on its large population to provide the required demand for their products to generate the required income. Government expenditure has, however, been seen to mainly lie in the areas of education, healthcare and other social expenditures (Jia, Guo and Zhang, 2014). The government however hardly spent anything on education. Its expenditures rose by 3% in 2013, lower than the 28.3% increase the previous year. It’s spending on lower-cost housing increased by 16.4% the previous year (Tradingeconomics.com, 2015). Beijing enhanced its spending on health care by 13.3% in 2013 while employment-related benefits expenditure rose by 14.6%. The government has been committed to providing enough jobs and ensuring social strength. Tax revenue also grew 9.8% from a year earlier to Rmb11.05 The trillion. General deficit rose to 2.0 per cent of GDP in 2013 and 2014. (Tradingeconomics.com, 2015) Monetary Policy The central bank of China has designed and implemented the monetary policy that it has been in use over the past two years. The People’s Bank of China has continued to ensure stability of credit growth as it reforms the policy when necessary (Zhang, Fan and Haan, 2010). The people’s Bank of China has classified its monetary policy as prudent which is allegedly a neutral stance. Contradictorily, the policy has over the years continued to tighten, to return to normal the out-of-control property market and to reduce the huge debts (Guo et al., 2011). Central bank is seen to be committed to stable monetary policy. It faces the challenge of formulating new ways to earn funds from foreign currency (Guo et al., 2011) as money creation through bank purchases of foreign exchange falls from Rmb2.1 trillion in 2014 to Rmb640 billion in 2013 (Monetary Policy, 2013). Conversely, monetary policy tools such as market operations and lending by the People’s Bank of China generated base money of Rmb2 trillion in 2014 compared with the Rmb100 billion losses the previous year (“China Interest Rate”, 2015). The People’s Bank of China has used an array of monetary tools in the past two years in an effort to ensure base money keeps growing despite declining capital inflows. The Required Reserve Ratio (RRR), where commercial banks must have a certain ratio of foreign exchange reserve is a major monetary policy tool (Vogel, 2011). A standard RRR cut creates an estimated Rmb2.4 trillion in new funds after applying the multiplier. Other tools include short-term liquidity operation that allows banks to borrow funds one to three days when in extreme liquidity distress. Another tool is the Standing Lending Facility, which lets commercial banks borrow from the central bank for one or three months (Vogel, 2011). The Pledged supplementary lending is another tool that supports loans to sectors struggling to acquire credit such as small businesses. The medium Lending Facility offers three-month loans to commercial lenders to give credit to under provided sectors. Relending with credit-asset collateralisation allows commercial banks to use high-quality loans as collateral. As the central bank continues to reduce its high interest on loans, more firms borrow from them at the lower rates and also use them to pay off high-yield debt. This lessens firms’ financial burden while reducing risk of default (Vogel, 2011). On October 1, 2014, the Chinese central bank, and the China Banking Regulatory Commission launched a new housing credit policy due slow economic growth and probable diminishment of the real estate market. The policy’s purpose was to increase housing demand while flourishing the real estate market thus leading to a massive economy rise for China and improving its growth rate. Real estate here is a tool for macroeconomic regulation with the goal being to make China a real-estate-based economy like before. This new policy shows the commitment of the Chinese government to solving economic problems. This also shows the ability of macroeconomic policies to reverse problematic issues (“China Interest Rate”, 2015). Coordination of the Monetary and Fiscal Policy Both the monetary and fiscal policies are used to influence the expansion and contraction of GDP as a measure of economic growth. Successful integration of the fiscal and monetary policies in the past two years have reduced inflation. Both policies must be well coordinated. This is relevant in the government bond market, which has become a source of the central bank’s money supply. Outstanding debts, whether long-term, medium-term or short-term affect the bank monetary operations. Also, due to bonds’ lack of diversity, it becomes difficult for the central bank to consider all parties’ interests when conducting open market operations. This, therefore, begs communication and coordination of central bank and the government while formulating and implementing macroeconomic policies (Guo et al., 2011). Conclusion Ultimately, it can be said that macroeconomic policies are a major tool that controls a country’s inflation rate, growth rate, debt-GDP-ratio and all factors in an economy. China, as seen in the essay, has used its fiscal and monetary policy to avert the effects of global economic decline. Macroeconomic policies must, therefore, be formulated wisely while constantly being reformed, as is the case for China and the Central Bank of China, for a successful economy. Bibliography China Interest Rate | 1996-2015 | Data | Chart | Calendar | Forecast | News. (2015). Available at: http://www.tradingeconomics.com/china/interest-rate [Accessed 12 Mar. 2015]. Guo, Q., Jia, J., Zhang, Y. and Zhao, Z., 2011. Mix of Fiscal and Monetary Policy Rules and Inflation Dynamics in China. China & World Economy, 19(5), pp.47-66. He, Q. and Chen, H., 2014. Recent macroeconomic stability in China. China Economic Review, 30, pp.505-519. Jia, J., Guo, Q. and Zhang, J., 2014. 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