The View

Why China can’t afford to tighten economic policy just yet

China’s growth in 2020 was driven by fixed-asset investment and exports. This is not ideal

To achieve higher growth in 2021, China needs a larger increase in infrastructure investment, and the government may have to issue more bonds than planned

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The Yangbaoshan Grand Bridge, a key section of the Guiyang-Huangping highway, is under construction in Guizhou province. In 2020, China’s infrastructure investment grew by just 0.9 per cent, compared to more than 40 per cent in 2009. Photo: Xinhua

Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006.

Published: 2:30pm, 15 Apr 2021Updated: 4:33pm, 15 Apr 2021

The Chinese economy grew by 6.5 per cent in the fourth quarter of 2020, providing a strong indication that it has recovered from the Covid-19 shock. The market consensus is that, due to base effects, GDP growth shot up to more than 18 per cent year on year in the first quarter of 2021, and will fall steadily in the remaining three quarters of the year before finally stabilising.

Addressing this year’s meeting of the National People’s Congress last month, Premier Li Keqiang announced that China’s growth target for 2021 is “above 6 per cent”. While the economy’s growth momentum looks strong at the moment, there are signs that China may risk tightening fiscal and monetary policy too soon.

According to the Ministry of Finance, general budget revenues will increase by 8.1 per cent this year, while general budget expenditure will grow by just 1.8 per cent. It is rare for government spending to grow so much more slowly than budget revenues.