China needs active fiscal steps to push growth

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Beijing, Aug 28: China should pursue a more active fiscal policy to fend off a possible sharp economic slowdown, a senior government economist said in remarks published on Thursday.

Beijing has shifted its focus to safeguarding growth from preventing overheating after the pace of economic expansion slowed too sharply for the government's liking in the first half. "Faced with pressure from a tight monetary stance, fiscal policy should become more active to prevent an excessive drop in economic growth," said Xia Bin, a senior researcher with the Development Research Centre, a cabinet think-tank. Monetary policy should be set to control China's economic aggregates while fiscal policy should be used to offer more support to small firms, Xia told the China Securities Journal.

Tao Wang, the head of China economic research with UBS, said she expected China to relax both fiscal and monetary policy if the economy slowed to a range of 8-9% this quarter.

She told reporters Beijing might spend more on energy and other infrastructure and increase handouts to low-income groups.

China's central bank was likely to ease credit quotas further, following a 5% increase last month, so that banks can lend more, especially to sectors like small business and agriculture, Wang said.

State media and a US advisory service have reported that Beijing is studying a stimulus package of tax cuts and increased spending worth up to 400 billion yuan ($58.5 billion). A senior official close to policy makers told Reuters that contingency planning for a stimulus package is still in the early stages as the authorities monitor the health of the economy. Beijing would launch the package only if weakness in exports spills over to the domestic economy, undermining the firm trend in home-grown demand, he added.

Annual growth in gross domestic product slowed in the second quarter to 10.4% from 11.9 % in all of 2007, and Goldman Sachs said on Thursday that its proprietary indexes of the Chinese economy pointed to further weakness in July.

The annual economic growth rate, as measured by the bank's China Activity index, slowed to 10.1% in July from 10.5% in June, reflecting significantly lower industrial output growth. Goldman also said that the CEMAC-GS coincident indicator, which it compiles together with the China Economic Monitoring and Analysis Centre under the National Bureau of Statistics, softened to 103.41 in July from 103.71 in June.